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

[BlackPeter]

The bolt-on acquisition of Motorplus Nz Ltd ,with 6,000 policies, adds further scale to TRA's insurance division.
Sensible.

Agree - it certainly will help them to get their insurance branch closer to (or maybe even above) critical mass ...

[percy]

Agree - it certainly will help them to get their insurance branch closer to (or maybe even above) critical mass ...

They reached [or went well above] critical mass when they acquired Autosure Insurance.

[Beagle]

They reached [or went well above] critical mass when they acquired Autosure Insurance.

That's all well and good but I did not see this phrase or anything to that effect in the announcement, "We expect this acquisition to be eps accretive immediately"
They are found of growing the company through raising capital and bolt on acquisitions but the EPS growth to date has been underwhelming in my opinion.
This has to change in FY18 or I will redeem my convertible notes for cash on 30 September 2018. I won't give them any more time than FY18 to prove they can materially grow EPS.

[percy]

Correct.
However they have been steadily laying very strong foundations for a truely great company.
I am happy to heavily invest in TRA,as they keep doing the right things.Each acquisition has improved the core business's strength.
The results will come,and they will be well worth waiting for.

[Snoopy]

Divisional EBIT Allocation FY2016
	EBT	Revenue	EBT Corporate Reallocated (A)	Interest Expense	Liabilities	Corporate Interest Expense Reallocated (B)	EBIT: (A)+(B)
Auctions & Fleet	$6.698m	63.64%	$3.090m	$2.626m	28.21%	$3.226m	$6.316m
Finance	$20.531m	36.46%	$18.461m	$6.685m	71.79%	$8.210m	$26.671m
Corporate & Other	-$5.678m			$2.125m
Sub Total	$21.551m
Eliminations	$0m
Total	$21.551m	100.00%	$21.551m	$11.436m	100.00%	$11.436m	$32.987m

Divisional EBIT Allocation FY2017
	EBT	Revenue	EBT Corporate Reallocated (A)	Interest Expense	Liabilities	Corporate Interest Expense Reallocated (B)	EBIT: (A)+(B)
Automotive Retail	$11.936m	72.77%	$6.046m	$3.052m	33.82%	$3.838m	$9.884m
Finance	$20.790m	27.23%	$18.585m	$5.972m	66.18%	$7.512m	$26.097m
Corporate & Other	-$8.095m			$2.327m
Sub Total	$24.631m
Eliminations	$0m
Total	$24.631m	100.00%	$24.631m	$11.350m	100.00%	$11.350m	$35.981m

SNOOPY

[Snoopy]

TNR, I think is best considered as a 'hybrid' company. The successful 'Auction & Fleet' business will distort comparisons with other more pure finance companies. So 'Auction & Fleet' needs to be taken out for financial company yardstick comparisons. Do that and the 'deconstructed' TNR business is represented in the table below

TNR for FY2016
	Assets	Liabiliities	Shareholder Equity	Interest Expense	NPAT	ROE
Auctions & Fleet (FY2016)	$99.815m	$65.582m	$34.233m	$3.23m	$2.225m	9.2%
Finance, Insurance & Collection Services (FY2016)	$262.488m	$166.909m	$95.579m	$8.21m	$13.292m	13.9%
Divisional Total (FY2016)	$362.303m	$232.491m	$129.812m	$11.44m	$15.52m	12.0%

TRA for FY2017
	Assets	Liabiliities	Shareholder Equity	Interest Expense	NPAT	ROE
Automotive Retail (FY2017)	$164.16m	$130.18m	$33.98m	$3.84m	$4.353m	12.8%
Finance, Insurance & Collection Services (FY2017)	$392.47m	$254.74m	$137.73m	$7.51m	$13.382m	9.72%
Divisional Total (FY2017)	$556.63m	$384.92m	$171.71m	$11.35m	$17.73m	10.3%

Care needs to be taken when interpreting these figures, taken from the Annual Report of FY2017. The assets and liabilities are end of year figures. So they aren't necessarily representative of the assets and liabilities that were on the books through the year because two major acquisitions:

1/ 'Buy Right Cars' (29th July 2016), now part of 'Automotive Retail'
2/ 'Autosure' (31st March 2017), which I have grouped into 'Finance' above.

With 'Autosure' in particular, this came onto the Turners books on 31st March 2017. Yet no earnings for this business contributed to the 'Finance Division' result because 31st March 2017 was also the balance date. Thus the apparent sharp deterioration in 'Finance ROE' for the year is not what it seems.

SNOOPY

[Snoopy]

Care needs to be taken when interpreting these figures, taken from the Annual Report of FY2017. The assets and liabilities are end of year figures. So they aren't necessarily representative of the assets and liabilities that were on the books through the year because tow major acquisitions:

1/ 'Buy Right Cars' (29th July 2016), now part of 'Automotive Retail'
2/ 'Autosure' (31st March 2017), which I have grouped into 'Finance' above.

With 'Autosure' in particular, this came onto the Turners books on 31st March 2017. Yet no earnings for this business contributed to the 'Finance Division' result because 31st March 2017 was also the balance date. Thus the apparent sharp deterioration in 'Finance ROE' for the year is not what it seems.

Note 18 in AR2018 allows us to annualize the profit contribution from acquisitions.

1/ Buy Right Cars:

"If the acquisition had occurred on 1st April 2016, management estimates the group consolidated <snip> profit before acquisition for the year would have been $18.6m"

Since the group consolidated profit was $17.574m, the extra contribution to profit from 'Buy Right Cars' would have been: $18.6m - $17.574m = $1.026m

That in turn means the underlying ROE for the automotive retail business is significantly higher than in my table in post 1478.

ROE [Turners Automotive Retail Only]: ($1.03m + $6.67m) / $33.98m = 22.7%


2/ Autosure:

"If the acquisition had occurred on 1st April 2016, management estimates the group consolidated <snip> profit before acquisition for the year would have been $23m"

Since the group consolidated profit was $17.574m, the extra contribution to profit from 'Autosure' would have been: $23.0m - $17.574m = $5.44m

That in turn means the underlying ROE for the finance business is significantly higher than in my table in post 1478.

ROE [Turners Finance Only]: ($5.44m + $11.06m) / $137.73m = 12.0%

(Note: 12% is very similar to the previous year figure of 11.6% from FY2016)

My observation: Both the 'Automotive Retail' (formerly Auctions and Fleet) and 'Finance' divisions are operating with greater capital efficiency than in FY2016. But it is the Automotive Retail business that is giving a better return on investment than the finance division by a factor of almost two to one. And that is a big difference compared to FY2016!

SNOOPY

[Snoopy]

In recognition of TNR being a hybrid company, I am no performing the EBIT to Interest expense test on the finance section of TNR only (my post 1257).

Updating for the FY2016 financial year (ended 31-03-2016)

The underlying interest expense is shown under note 7 (AR2016) to be $11.436m. Of this ( $11.436m x 0.7179= ) $8.210m can be applied to the finance division.

The underlying EBT for the finance division may be found in the same post.

(EBT +Interest Expense)/(Interest Expense) = [$15.385m+$8.210m]/$8.210m = 2.87 > 1.2

=> Pass Test

In recognition of TNR being a hybrid company, I am now performing the EBIT to Interest expense test on the finance section of TNR only (my post 1477).

Updating for the FY2017 financial year (ended 31-03-2017)

The underlying interest expense is shown under note 7 (AR2017) to be $11.350m. Of this ( $11.350m x 0.6618= ) $7.511m can be applied to the finance division.

The underlying EBT for the finance division may be found in the same post.

(EBT +Interest Expense)/(Interest Expense) = [$18.585m+$7.511m]/$7.511m = 3.47 > 1.2

=> Pass Test

SNOOPY

[Snoopy]

I am changing my analysis this year so that the financial statistics that I am evaluating are applied only to the financial division of the company.

I<script src="https://adservice.google.co.nz/adsid/integrator.sync.js?domain=www.sharetrader.co.nz" ></script><script >processGoogleTokenSync({"newToken":"FBS"},5);</script> am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found in the 'Consolidated Statement of Financial Position' (AR2016, p26).

Tier 1 capital > 20% of the loan book.

(Turners Group (Finance Division) has only Tier 1 capital for these calculation purposes.)

Tier 1 Capital = (Shareholder Equity) - (Intangibles: less Turners Auctions Intangibles) - (Deferred tax: Assume finance division using up deferred losses)
= (0.7245x$121.892m) - ($105.338m -$45.600 -$22.859) - $0m
= $57.170m

The money to be eventually repaid to the company (assets of the company) can be found as assets on the balance sheet. This is the sum total of:

1/ 'Financial Assets at fair value through profit or loss': $18.455m
2/ 'Finance Receivables': $167.598m
3/ 'Receivables and deferred expenses': 0.7179 x $8.505m
4/ 'Reverse annuity mortgages': $9.374m

For the FY16 year these come to $201.532m

$57.170m > 0.2 x $201.532m = $40.307m (true)

=> Pass Test

SNOOPY

I am continuing my analysis this year so that the financial statistics that I am evaluating are applied only to the financial division of the company.

I am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found in the 'Consolidated Statement of Financial Position' (AR2017, p38), and my post 1470 on asset allocation.

Tier 1 capital > 20% of the loan book.

(Turners Group (Finance Division) has only Tier 1 capital for these calculation purposes.)

Tier 1 Capital = (Shareholder Equity) - (Intangibles: less Turners Auctions Intangibles)
= (0.7051x$171.716m) - ($172.088m -$45.600 -$22.859)
= $17.448m

The money to be eventually repaid to the company (assets of the company) can be found as assets on the balance sheet. This is the sum total of:

1/ 'Financial Assets at fair value through profit or loss': $10.320m
2/ 'Finance Receivables': $207.143m
3/ 'Receivables and deferred expenses': 0.7051 x $8.489m
4/ 'Reverse annuity mortgages': $9.222m

For the FY17 year these come to $232.678m

$17.448m > 0.2 x $232.678m = $46.536m (false)

=> Fail Test

SNOOPY

[Snoopy]

=> Fail Test

The above is the key point. But in non-numerical terms, what does it mean?

The basis behind this test is that, at some point in the longer term future, a significant proportion of the loans that Turners will cash up could lose value. If the value of the security cannot match the value of the loan then Turners could lose money. It is OK to lose some money. In fact if you are in the business of making loans, assuming that every loan will come back intact is unrealistic and an unacceptable business practice. As a money lending business owner, you cannot prepare for an absolute doomsday scenario. But it is comforting for stakeholders to know that there is something of worth inside the company that could be sold in an emergency. The first line of 'money potentially available' is the money that shareholders put in, to found the business - and retained profits from that business over the years. That money is 'shareholder equity'.

'Shareholder equity' can be thought of as a buffer to offset loans that go bad. But 'shareholder equity' is not the same as 'cash in the bank'. Much of Turners 'shareholder equity' has been spent on 'intangible assets'. This spending has been voluntary. The only reason that Turners is prepared to spend more than a business is worth, in tangible asset terms, is because it is worth spending that much to gain access to the acquired businesses cashflows. The potential outcome of buying a new business is always well researched. But the actual result of buying a 'bolt on business' can only be measured 'after the event'. There are many cases of businesses being acquired at 'above book value' with all sorts of hype, only to be written down years later with the head of the acquiring company claiming it is a 'non cash item', so shareholders shouldn't worry. Well, that 'non cash item' was cash once. And if a bolt on business has been acquired at an 'over the odds' price then that cash is gone and so is the 'capital safety buffer' that the cash once represented.

The 'Turners Auctions' business, as acquired three years ago, has consistently exceeded its sales and profit targets. It was bought at a price above net asset value, and that means both intangible assets and brand value (in this case) have found their way onto the acquisitors books. But there is little doubt that if the Turners parent wanted to float off the old Turners Auctions today, they would get all of their money back and then some. This is why I have removed the value of the Turners Auction acquisition form the intangible assets value. TNR would get all their money back on this one if they wanted to. The more recent acquisitions I think are yet to prove themselves. They could be gems. But from a creditors perspective, there is not the track record to show this. And herein lies the problem.

If one or more of these new acquisitions does not work out as management planned, then they might not be saleable. Other creditors, in the wake of a wider automotive industry slowdown, could lose money. Management would describe these recent acquisitions as earnings acquisitive. Shareholders might equally view them as unsaleable and therefore putting their investment capital at risk. This is not a comfortable situation for shareholders/bondholders IMO.

SNOOPY