What happens in a tough market?
Quote:
Originally Posted by
BlackPeter
I think your (beagle's) view is absolutely legitimate - and sure, if TRA's strategy doesn't work out and they always stay a boring old used car dealer without any noticable additional income from insurance, finance, maintenance, end-of-life business and property development than, yes - longterm an average PE of around 10 might be quite appropriate. But isn't their income from all these other "branches" growing?
I have long been concerned about the reverse of the 'clip the ticket' effect. While things are going well, all the different divisions get to 'clip the ticket' in a growth spiral. But when things are not going so well, do all the divisions miss 'clipping the ticket' in a contraction spiral?
The downturn in the car market that has affected Auckland and the figures thrown up by that shed some light on this question.
Division |
HY2019 |
HY2018 |
Change |
FY2017 |
HY2017e |
Automotive Retail EBT {A} |
$8.013m |
$8.771m |
-8.64% |
Automotive Retail Revenue {B} |
$112.765m |
$115.694m |
-1.49% |
Automotive Retail EBT Margin {A}/{B} |
7.11% |
7.58% |
|
Inventory |
$42.877m |
$42.143m |
+1.74% |
|
Finance EBT {C} |
$5.423m |
$5.537m |
-2.06% |
Finance Revenue {D} |
$25.564m |
$17.791m |
+21.2% |
Finance EBT Margin {C}/{D} |
21.2%% |
31.1% |
|
Insurance EBT {E} |
$6,414m |
$2,627m |
+154% |
Insurance Revenue {F} |
$25.669m |
$22.369m |
+14.7% |
Insurance EBT Margin {E}/{F} |
25.0% |
11.7% |
|
Autosure EBT |
|
|
|
$5.426m/0.72 |
$3.768m |
Autosure Revenue |
|
|
|
$34.300m |
$17.150m |
Autosure EBT Margin |
|
|
|
22.0% |
22.0% |
|
Collection EBT {G} |
$3.076m |
$3.413m |
-9.87% |
Collection Revenue {H} |
$9.249m |
$10.189m |
-9.23% |
Collection EBT Margin {G}/{H} |
33.2%% |
33.5% |
|
The increasingly tough Auckland market has barely affected overall car sales revenue. So Turners are still able to shift nearly as many cars as before. But the operating profit on car sales is hurting. Inventory is slightly up on the prior comparative period (pcp). But 1.7% is near margin of error stuff. Divided by the number of branches now open, with new branches in Wellington City and New Plymouth and Hamilton, the number of stock per premises may even be down. The new Turners branches plus the new 'Buy Right Cars' branch in Hamilton is evidence of Turners growing market share in a tight market.
Meantime in Finance, revenue is up strongly even as car sales are static. Part of this could be the new dealers outside of Turners ownership who are plugged in to Oxford Finance, those 150 new originators that Percy keeps referring to. But not all Oxford Finance is car finance. It is possible that Oxford are taking on more consumer loans as the big banks tighten their lending criteria.
Insurance is up strongly with both profit and revenue. The purchase of 'Autosure' was settled on 31st March 2017, which is Turner's balance date. So FY2018 was the first year that 'Autosure', extended mechanical warranty insurance, became part of the Turners Automotive Group. We must also remember that Insurance includes a likely $6m in premiums relating to Life insurance, completely unrelated to Automotive sales activity. We heard at the roadshow how the payout ratio on European brand cars with Autosure policies was generally much higher than those of Japanese origin. And that Turners would be adjusting their Autosure premium pricing to reflect this. That change, plus better integration with the finance operation are likely largely responsible for the hugely improved performance of the insurance division.
When faced with a downturn it is tempting to suggest that Sales, Finance and Insurance will suffer together. But this assumption is assuming that all three divisional sales already reflect maximum integration efficiencies across the whole group. This is far from the truth as the half yearly pcp comparisons show. We can also expect that retail stocking rates will now be closely monitored to ensure that excess inventory, or the wrong type of inventory does not stick around. I would be expecting a slight uptick in car sales profitability going forwards, even if car sales shrink from here, as a result of better matching inventory to market.
The EC Credit side of the business shows a remarkably consistent margin even though revenue has fallen. This is because EC Credit is not an asset rich business to run and wage inflation can be offset by increasing automation. EC Credit is going along its own path with significant expansion planned in Australia. This is uncorrelated with the NZ car sales market, and we shareholders can realistically hope for better things from EC Credit.
Overall then, I see far from a gloomy picture. The benefits of a fully integrated business in NZ are, I believe, yet to be fully seen. I have plenty of optimism that these improvements will offset any short term retail downturn. The share buyback will help improve the eps situation after years of dilution. And Turners have the ability to quickly turn inventory into cash if there are ever any parent bank debt issues to address. Has the share price reached a bottom? Mr Market always has the last word on that! But I have some cash available for some fresh 'bottom picking' if the share price moves lower.
SNOOPY