Despite what I wrote above, I am generally comfortable with a company having lots of intangible assets on the books provided:
1/ The assets were bought at the right price.
2/ The businesses that Turners acquired have continued to grow.
My one cause for concern is 'Buy Right Cars'. Turners management have acknowledged that it has not performed up to expectations and that the management has been replaced. There is over $10m in 'Buy Right' goodwill on the Turners books ($10.860m to be excat AR2018 p60). This is tested annually by the auditors, who check whether such value can be justified. So far all is hunky dory. But I did notice a divergence in the growth assumptions for this acquisition going forwards. See AR2018 p65. I tabulate these results against the equivalent assumptions from last year:
|
Year 1 Forecast Cashflows |
Year 2 Forecast Cashflows |
Year 3 Forecast Cashflows |
Year 3-4 Forecast Cashflows |
Year 4 to 5 Forecast Cashflows |
Terminal Cashflows |
FY2017 Perspective |
10% |
7.5% |
|
5.0% |
|
2.0% |
FY2018 Perspective |
|
60% |
8.0% |
|
5.0% |
2.0% |
The note starts "The year 1 forecast cashflows were extrapolated". I think 'year 1' means the 'current reporting financial year', but am not 100% sure. If I am right then from an FY2018 perspective 'Year 2' means FY2019 (the current financial year). This model is telling us that Turners are budgeting for an increase in cashflows from Buy Right cars of 60% this financial year. That is an enormous increase, even for a company with the growth ambitions of Turners. It is particularly shocking when you realise that only 12 months previously, Turners were looking for an increase of only 7.5% over the same time period. No doubt part of the reason the 'Buy Right' growth rate is forecast to be so high is because FY2018 so was disastrous. Turners are starting from an unexpectedly low base. But even so I think it is a big ask.
The question is, what happens to the 'Buy Right' goodwill if this 60% growth is not achieved? Possibly nothing. But it is also possible that Turners will be facing a multi-million dollar goodwill write down. If it happens it will be a 'non cash item'. But it was real cash, not that long ago! The company might require some recapitalisation if the write down happens. This is a real 'extra risk' for shareholders going forwards IMO.