TRA - Turners Automotive Group [previously TNR - Turners Limited]

[Snoopy]

No I haven't used ECC but their offering seemed good to me
Maybe some else has

I jumped to the conclusion that because EC Credit sent you an e-mail, you might be an EC Credit customer. I got that wrong. This leads me to two other possibilities.

1/ EC Credit has been spamming you (not good).
2/ You are Xero customer, and Xero is actively promoting EC Credit now the app is in place (probably good for Turners shareholders).

Am I on the right track?

SNOOPY

[Snoopy]

	Profit FY2018	Profit FY2019	Reference
As declared	$23.360m	$22.719m
less Retrospective impairment provision adjustment	0.72 x ($1.212)m		My post 3980, this thread
less Revaluation Investment Property gain	($0.820)m	($0.830)m	AR2018 p51, AR2019 p55
less Gain on Sale of Property, Plant and Equipment	($1.000)m	($3.607)m	AR2018 p51, AR2019 p55
less Gain on NZTA acquired leasehold premesis		($3.393)m	AR2019 p55
less MTF Shareholding revaluation	($0.612)m	$0m	AR2018 p67, AR2019 p71
less reduction in already budgeted 'Buy Right Cars' earn out provision to P&L	($2.600)m		HYR2019 p49
less Insurance and Life Investments Contract Adjustments	($2.664)m	($5.804m)	AR2018 p51 and p76, AR2019 p86
add Impairment of 'Buy Right Cars' Brand		$4.300m	AR2019 p31
equals	$14.791m	$13.385m

	Shares on Issue FY2018	Shares on issue FY2019
	84,802,812	86,888,064
Normalised Annualised Business eps	17.4c (FY2018)	15.4c (FY2019)

Notes

4/ I leave the most significant part of my 'profit normalisation' until last. Have a look at AR2019, note 34c, part of the insurance activities notes.

	FY2019	FY2018
Change in Discount rate	($0.207m)	($0.120m)
Difference between actual and assumed experience	$5.745m	$2.491m
Life Investments Contracts: Difference between actual and assumed experience	$0.266m	$0.294m
Total	$5.804m	$2.664m

Now go to note 7, p55 in AR2019 and you will see that the $2.664m figure is reported as a 'Fair value gain on Contingent Consideration' for FY2018. Yet the equivalent figure for for FY2019 is missing, no doubt subsumed in the new expanded for this year Insurance divisions wider profits. I consider that $5.804m not repeatable and a figure that should be removed from operational profits, just like in FY2018. I don't know why Turners seem to have changed their policy on this but I am calling them out. Take out that $5.804m gain from the Turners Insurance arm operating profit (declared $8.227m for FY2019) and you will find how profitable the underlying insurance division really was in FY2019.

Snoopy - thats not very good is it

Just as well every body likes those abnormal items

What on earth is going on? PGW are having all sorts of problems with their retirement plan and have just pumped $10m into it to keep things solvent. Somehow they have kept this cash injection out of the annual profit figures.

Meanwhile in the same macro environment, TRA are booking multi-million dollar gains on their insurance portfolio and it does seem to be flowing through to profit. Quoting from AR2019 p86:

"The disclosure of the components of operating profit after tax expense are required to be separated between policyholder's and shareholder's interests. We have included only one column as policyholder profits arise only in respect of a small number of participating policies, and the profits arising from these policies were effectively zero. Accordingly all of the profits earned during the year are shareholder profits."

So it looks like Turners have invested their insurance float very wisely, earned enough to pay out their policy holders and are pocketing the surplus gain?

TRA are on a mission to simplify their business to make it easier to understand for existing and potential shareholders I must say that their insurance profits are anything but transparent. The AR2019 note 34C reports the insurance activities 'after taxation' of $6.990m. Yet if we go to the 'Segmented Results' on p53 we get 'Operating Profit' (which equates to Earnings Before Tax) of $8.227m. That implies a tax rate on insurance profits of just 15%.

The most significant item in the profit equation comes under the header:

"Insurance Contracts: Difference between actual and assumed experience"

The large positive gains of FY2018 ( $2.491m) and FY2019 ($5.745m) would suggest substantial out performance of pre-assumed earnings assumptions. Yet most of these insurance contracts would be for relatively short term mechanical repair insurance. This would suggest that the insurance float would normally be invested in fixed interest investments. And we all know that yield on fixed interest has been under pressure. Turners are on record as saying that they have boosted their insurance float returns by doing 'in house property development'. Yet if we look at note 7, the break down of 'Profit After Tax' (p55 AR2019) , in particular for the year FY2018, we can see that the property gains are listed as separate to the 'Fair Value Gain on Contingent Consideration' that I have previously linked to Insurance Division profits. This would seem to rule out the 'Difference between actual and assumed experience' incorporated in the $2.664m windfall for FY2018 being from property gains.

So we now have a mystery: If large incremental 'Fair Value Gain on Contingent Consideration' is not from property development and fixed interest returns are under pressure, where have these insurance related windfall gains of FY2018 ( $2.491m - AR2019 p86) and FY2019 ($5.745m- AR2019 p86) come from?

SNOOPY

[percy]

It may help to remember TRA have legacy insurance, which should not get mixed up with their Autosure "insurance" business.
Property.I find it easier to refer to their cash flows from investing activities.page 34 annual report. I compare inflow with outflow ,keeping in mind inflow will include profits, while outflow will be new investments at cost.

[Snoopy]

It may help to remember TRA have legacy insurance, which should not get mixed up with their Autosure "insurance" business.

You are quite correct Percy. 'Autosure' was acquired on 31st March 2017.

The TRA insurance revenue earned over FY2017 (ye 31/03/2017) was $12.255m. With the inclusion of a full year of 'Autosure' , that revenue figure jumped to $46.923m over FY2018. This means that from a revenue perspective, the insurance business at Turners today is at least 73.9% 'Autosure' going forwards. Under note 34C, the surplus legacy life insurance contracts profits are separated out. That makes sense because Life Contracts must be managed from a longer term perspective. But the annual gain from 'Difference between actual and assumed experience" for life contracts was only $0.266m. That is dwarfed by the 'Difference between actual and assumed experience" for (other) Insurance Contracts of $5.745m, and that latter figure must include the 'Autosure' contracts.

What I am saying here is that most of the insurance contracts that Turners write would be 'short term', say from two to five years. That would indicate a bias towards using fixed interest investments to underwrite projected payouts. I don't think the mystery of those windfall insurance out performances that TRA have booked as shareholder profits in the last couple of years has been answered.

SNOOPY

[percy]

Ring Aaron.

[kiora]

I jumped to the conclusion that because EC Credit sent you an e-mail, you might be an EC Credit customer. I got that wrong. This leads me to two other possibilities.

1/ EC Credit has been spamming you (not good).
2/ You are Xero customer, and Xero is actively promoting EC Credit now the app is in place (probably good for Turners shareholders).

Am I on the right track?

SNOOPY

I did inquire about using their services a few years ago.They did seem to have good collection methods from my inquiries.
I didn't follow through as I assessed the debtor to have no money & had moved to Australia.
ECC where good at following up on my inquiry & offed the voucher as an inducement
I think ECC is good fit for their car loans & their business

[Snoopy]

3/ Details of the MTF shareholding revaluation through profit and loss are taken from AR2018 p67. If we go to page 52 of the 'MTF Annual Report 2018', 'Turners Finance' held 1,895,891 shares at the MTF 30th September balance date.

The valuations of the Turners MTF holding at TRA balance date imply the following MTF share price(s) at the TRA balance date(s) (31st March):

MTF share price 31-03-2017: $3.008m / 1.896 = $1.59
MTF share price 31-03-2018: $3.620m / 1.896 = $1.91

The change in the valuation of MTF shares held over that year was:

$3.620m - $3.008m = $0.612m

This doesn't quite align with the 'valuation gain on (all) investments' of $0.590m on AR2018 p51. But it is close enough to suggest that the revaluation of those MTF shares is the most important component of that.

Curiously if we look at the equivalent page in AR2019 (p71) the change in the value of the MTF shareholding is not mentioned. Yet it does say that Turners is still a shareholder in MTF. Can anyone explain why the change in the value of the MTF shareholding seems to not be reported on over FY2019?

I have found a link to the current value of MTF shares

http://www.sharemart.co.nz/Secure/Mo...inance-Limited

Last trade was on 5th August 2019 for $2.10. Shares are on offer at $2.05 but there are no buyers. I have been unable to find historical MTF price information. If anyone can find that please post a link! A value of $2.05 isn't so far removed from the $1.91 book value recorded in the Turner's accounts as at 31-03-2018. So maybe the value as at 31-03-2019 was still $1.91? No matter, it is odd that the equity value of this non-controlling interest of MTF of just under 10%, has apparently not been reported on AR2019. Maybe there is an 'out' that you don't have to report, if a change in equity value is below a certain threshold?

SNOOPY

[Snoopy]

Turners Automotive Group (TNR/TRA)		FY2015	FY2016	FY2017	FY2018	FY2019
No. Shares on Issue EOFY (TNR/TRA) (*)		63.077m	63.432m	74.524m	84.803m	86.555m (est)
Normalised Earnings Per Share {A}		13.6c	24.2c	21.8c	22.5c	20.1c (est)
Actual Dividend Paid (cps) {B} (**)		5c + 4c	6c + 6c	7c + 3c +3c	4c + 4.5c +3c +3c	4.5c + 5c +4c +4c
Normalised Earnings Retained {A}-(B) (cps)		4.6c	12.2c	8.8c	8.0c	2.6c (est)

(*) The number of TNR shares on issue at the end of the financial year has been adjusted retrospectively for the 23rd March 2016 10:1 share consolidation. To see how the number of TRA shares on issue was derived for FY2015, refer to my post 1413 "Buffett Test 2: Increasing 'eps' Trend (FY2016 perspective): Preamble Part 2.

(**) The actual dividends paid by TNR/TRA over FY2015 and FY2016 were unimputed. This was because of prior losses incurred under the DPC/TNR/TRA structure. However, in my modelling the TUA group was already combined with DPC/TNR/TRA. Previous year TUA profits wiped out those previous year equivalent DPC/TNR/TRA losses. Under this modelled scenario, those FY2015 and FY2016 dividends would have been fully imputed. That's because looking at the combined picture, those prior offsetting DPC/TNR/TRA losses never happened.

From the above table the 'five year average' dividend payout was:

(9c + 12c + 13c +14.5c + 17.5c)/ 5 = 13.20c (net)

Average Gross Dividend Yield (based on a 28% tax rate) is therefore:

13.20/(1-0.28) = 18.33c

Using a capitalized value gross interest rate of 7.5% (see thread An Investment Story - Geneva/Turners/Heartland, post 40), this translates to a fair value share price of:

18.33c/ 0.075 = $2.44

Last year, I stated that I no longer believed this valuation method provided a satisfactory technique for valuing Turners Automotive Group. This was because the retained earnings of TRA are employed in growing the business, and this valuation method ignores that contribution.

With the share price today trading some 10% below this equivalent $2.44 valuation figure -a figure based only on historical dividend payments-, one could interpret this to mean that the 'retained earnings' part of the profit generated has been squandered and for share valuation purposes should be considered worthless.

More specifically during FY2018 the setting aside of the last part of the earn out consideration for 'But Right Cars' ($1.9m) has cast some doubt on how successful this acquisition will continue to be. Furthermore the market does not seem convinced that the 'Autosure' insurance acquisition is adding value. Or perhaps these two acquisitions are adding value, but insufficient value to compensate for declines in other established areas of the business? However, you interpret the YOY share price decline, the market doesn't like what it sees. Whether there is any evidence that any profit decline for FY2019 is permanent or even real has not been established. I think given a more medium term outlook the market is wrong. IMO we will be looking at a case of 'sell the rumor', 'buy the fact' when the annual TRA result is released in June.

The below 'declared dividend totals' are different to those that the company discloses.on page 10 of the July/August 2019 Road Show presentation. This is because I sum the dividends actually paid in a particular financial year, whereas Turner's are showing those dividends declared in a particular financial year.

Turners Automotive Group (TNR/TRA)		FY2015	FY2016	FY2017	FY2018	FY2019
No. Shares on Issue EOFY (TNR/TRA) (**)		63.077m	63.432m	74.524m	84.803m	86.888m
Normalised Earnings Per Share {A}		13.6c	24.2c	21.8c	17.4c	15.4c
Actual Dividend Paid + Retrospective Policy Adjustment(*) (cps) {B} (***)		5c + 4c	6c + 6c +4c(*)	7c + 3c +3c+ 1c(*)	4c + 4.5c +3c +3c	4.5c + 5c +4c +4c
Normalised Earnings Retained {A}-(B) (cps)		4.6c	8.2c	7.8c	2.9c	(2.1c)

(*) At annual report time 2019, it was announced that the dividend policy will be changed in the future so that the payout ratio increases from 50-60% of NPAT to 60-70% of NPAT. Where historical dividends have fallen short of this new standard, I have retrospectively increased these dividends to reflect 65% of underlying earnings.

(**) The number of TNR shares on issue at the end of the financial year has been adjusted retrospectively for the 23rd March 2016 10:1 share consolidation. To see how the number of TRA shares on issue was derived for FY2015, refer to my post 1402 "Buffett Test 2: Increasing 'eps' Trend (FY2016 perspective): Preamble Part 2.

(***) The actual dividends paid by TNR/TRA over FY2015 and FY2016 were unimputed. This was because of prior losses incurred under the DPC/TNR/TRA structure. However, in my modelling the TUA group was already combined with DPC/TNR/TRA. Previous year TUA profits wiped out those previous year equivalent DPC/TNR/TRA losses. Under this modelled scenario, those FY2015 and FY2016 dividends would have been fully imputed. That's because looking at the combined picture, those prior offsetting DPC/TNR/TRA losses never happened.

From the above table the 'five year average' dividend payout was:

(9c + 16c + 14c +14.5c + 17.5c)/ 5 = 14.20c (net)

Average Gross Dividend Yield (based on a 28% tax rate) is therefore:

14.20/(1-0.28) = 19.72c

Using a capitalized value gross interest rate of 7.5% (see thread An Investment Story - Geneva/Turners/Heartland, post 40), this translates to a fair value share price of:

19.72c/ 0.075 = $2.63

The FY2019 normalised result shows that dividends exceeded normalised earnings. In effect, the dividend is being propped up by proceeds from non repeatable property sales. While this may continue for the next year or two, it is not sustainable beyond that IMO. Beyond this time-frame, I think it is doubtful that the current dividend levels can be maintained. My modelling takes this into account: Actual dividend 17.5cpc for FY2019 vs Modelled dividend of 14.2cps. I like buying shares below fair value and a discount of around 20% is what I look for. That translates to around $2.10, which sounds like a good share target acquisition price for TRA!

SNOOPY

discl: Shareholder with an average acquisition price of $2.74 :-(. Obviously the assumptions that I was making about the business to justify my past purchases were different to the assumptions I am using today!

[Snoopy]

I'd definitely go to the Ferrari event over any AGM, very unlikely to go to sleep at the former.

Not when you're the Chairman and asking for an exorbitant fee increase. Mate, when you were a young fella didn't your mother tell you work comes before play

With the AGM coming up, time to get those votes in (got my voting form in the mail today). I quote the above two posts to remind shareholders what happened last year. For some reason when I opened the mail today I suddenly felt militant :-I

I have decided to vote AGAINST the reappointment of Grant Baker. Ten years at the top (even if the first five of those were when today's Turners was Dorchester) I think is enough. If the ticket clipping experiment isn't working, time to let someone else take the reins and bring together fresh ideas to move the business forward. I think I would have voted for Baker if he had decided to 'officially' stand down as Chair (after he did stand down for the AGM last year). I think anyone who holds 7% of the shares probably deserves a seat at the board table, But as the leader of the board, I say 'time is up'. Skipping the AGM to attend a Ferrari event shows where Baker's real loyalty lies. If you want a good work ethic at the company, and you are at the top, then you have to walk that walk. Driving around in a Ferrari instead of turning up for the most important day of what is on paper just a 13 day work year does not send the right message.

Alister Petrie is the Bartel Holdings director nomination. Bartel Holdings in the largest shareholder, with 10.99% of the shares on issue at EOFY2019, up from 7.95% at EOFY2018. Alister has a long career in marketing which is a skill set the board need. I will be voting FOR him.

Next the vote on the new company rules. I see they are deleting the rights of shareholders to demand a poll. Given the half hearted leadership culture at board level, I think the ability for shareholders to demand a poll is a good thing. Thus I will be voting AGAINST this motion.

Finally (or should that be firstly) I am happy to support the auditors as they are asking the right questions, especially on the valuations of the insurance contract liabilities.

Sadly I won't be able to get to the AGM myself. Any shareholders out there planning to put in a 'militant' appearance?

SNOOPY

[Snoopy]

My standard debt risk measure is something called MDRT or 'Minimum Debt Repayment Time'. This is a figure in years which is the answer to the question:

"If all normalised profits for the year were channelled into repaying 'net company borrowing debt', how many years would that take?"

For FY2016 the answer was as follows:

MDRT Turners Limited FY2016

[(Parent Bank Borrowings) + (MTA Borrowings) + (TNRHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($109.327m+ $42.300m + $23.189m) - $13.810m] / [ $15.573n + 0.72($1.041m) ] = 9.8 years

At EOFY2017, this figure has somewhat blown out.

MDRT Turners Limited FY2017

[(Parent Bank Borrowings) + (MTA Borrowings) + (TNRHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($191.565m+ $49.021m + $25.561m) - $69.069m] / [ $16.261 ] = 12.1 years

I don't usually like putting 'fudge factors' into these calculations. But in this instance, with the purchase of 'Autosure' right at the end of the financial year, and no earnings contribution received, I will 'fiddle the result' so you can see what difference it makes.

If we look at 'annualised earnings', including a full year contribution from 'Buy Right cars' and 'Autosure' (my post 1479), then we can argue NPAT should be:

$16.261 + $1.03m +$5.44m = $22.731m

[($191.565m+ $49.021m + $25.561m) - $69.069m] / [ $22.731m ] = 8.7 years

So maybe the debt repayment picture isn't so bad? Even so, I wouldn't call 8.7 years a low figure. The TRA balance sheet is, IMO, being worked pretty hard.

In these days of chasing yield, it becomes more important than ever to think about risk, My standard debt measure is something called MDRT or 'Minimum Debt Repayment Time'. This is a figure in years which is the answer to the question:

"If all normalised profits for the year were channelled into repaying 'net company borrowing debt', how many years would that take?"

For FY2019 the answer was as follows:

MDRT Turners Limited FY2016

[(Parent Bank Borrowings) + (MTA Borrowings) + (TRA100 bonds) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($251.282m+ $37.055m + $25.000m) - $15.866m] / [ $22.710m + 0.72($7.892m) ] = 10.5 years

My rule of thumb for the MDRT answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

The board has indicated that asset sales are on the cards. Given the high MDRT figure, this is a good thing. I wouldn't go as far as to say that TRA are in trouble. But take the profits from property development out and suddenly that MDRT figure blows out even more. I think it is a sound idea to scope out asset sales before your bankers suggest you do. Low interest rates should take the pressure off until a capital restructuring solution is found for TRA.

At the right price I still consider TRA an appropriate investment as part of a balanced portfolio. IOW if you 'back up the truck' to buy the 'cheap yield', make sure you have a few other trucks, backed up to other quarries, in your fleet.

SNOOPY