An Intangible dilemma: 'BuyRight' or 'BuyWrong' revisited
Quote:
Originally Posted by
Snoopy
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 exact 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.
The rebranding of 'Buy Right Cars' has lead to the write off of $4.300m in intangible brand value. However, the rest of the intangible assets acquired with the purchase of 'Buy Right Cars' remains on the Turners books.
The amount of 'Buy Right' goodwill on the Turners books is still $10.860m (AR2018 p60). This is tested annually by the auditors, who check whether such value can be justified. But there is a divergence of growth assumptions for this acquisition going forwards. See notes in AR2019 p64 and AR2018 p65. I tabulate these results against the equivalent assumptions from AR2017:
|
FY2018 |
FY2019 |
FY2020 |
FY2020-FY2021 |
FY2021 |
FY2021-FY2022 |
FY2022 |
FY2023 |
|
|
Year 1 Forecast Cashflows |
Year 2 Forecast Cashflows |
Year 3 Forecast Cashflows |
Year 3-4 Forecast Cashflows |
Year 4 Forecast Cashflows |
Year 4 to 5 Forecast Cashflows |
Year 5 Forecast Cashflows |
Year 6 Forecast Cashflows |
Terminal Cashflows |
FY2017 Perspective |
10% |
7.5% |
|
5.0% |
|
|
|
|
2.0% |
FY2018 Perspective |
|
60% |
8.0% |
|
|
5.0% |
|
|
2.0% |
FY2019 Perspective |
|
|
14.6% |
|
11.0% |
|
9.3% |
12.8% |
1.5% |
The note(s) start "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 and 'Year 3' means FY2020 (the current financial year). This table is telling us that Turners were budgeting for an increase in cashflows from Buy Right cars of 60% over FY2019. The actual increase in revenue for 'Buy Right Cars' from FY2018 ($62.021m) to FY2019 ($63.546m) was an increase of 2.2%. This 'miss' seems disastrous, yet no effect on the earnings goodwill acquired has been recorded. But could it be that this 'missed FY2019 growth' has been reassigned to other future years?
FY2018 Cashflow Growth Assumptions (Years 2 to 6) : 1.6 x 1.08 x 1.05 x 1.05 x 1.02 = 1.94
FY2019 Cashflow Growth Assumptions (Years 2 to 6): 1.022 x 1.146 x 1.11 x 1.093 x 1.128 = 1.60
Some growth looks to be reassigned. But there does seem to be a lot less cashflow coming when compared to the forecast from FY2018.
Remember that as a brand, 'Buy Right Cars' no longer exists. I think that means that all of that $10.860m in intangible 'on the books assets' from the 'Buy Right' trading operation is now attached to those individual sales sites acquired in Turner's 'Buy Right cars' acquisition. No land was acquired with the 'Buy Right' acquisition (AR2018 p60). Does this mean that the $10.860m of goodwill is, by a process of elimination, attached to the leases on these 'Buy Right' properties? If so, doesn't that make this $10.860m of goodwill extremely vulnerable?
In FY2017 eight 'Buy Right Cars' retail sites were acquired across Auckland. If the $10.860m in goodwill was distributed equally across each site, then that means each site incorporates goodwill totalling:
$10.860m / 8 = $1.358m
Now consider the case of a lease ending or Turners just deciding they want to move to a better site. Would such a move mean that Turners would have to write of $1.358m in goodwill, even though they were ostensibly moving to a site with improved business prospects? I think it does. Turners make much of their ability to develop retail sites and pocket the development margin. Quite rightly so. But I don't recall Turners mentioning anything about the 'million dollar moving loss' that would be incurred when they eventually have to leave those old 'Buy Right' sites.
Under note 32 AR2019, the site lease terms are between five and ten years, with rights of renewal in accordance with market rates.
SNOOPY