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

[Snoopy]

To ensure liquidity over the next twelve months, management has the ability to move resources between divisions. So despite this measure being of primary interest in sizing up financial companies, I believe it is more correct to study the TNR group as a whole. The current account information that I seek is in the FY2016 annual report, but it is scattered. Let's see what happens when I bring it all together again.

Financial Assets	0-12 months	Reference
Cash & Cash Equivalents	$13.810m	AR2016 p26
Financial Receivables Contractural Maturity	$75.735m	AR2016 p46
Reverse Annuity Mortgages	$1.366m	AR2016 p48 Note 16
Total Current Resources	$90.911m	(addition)
Financial Liabilities	0-12 months	Reference
Current Liabilities	$115.679m+$10.984m	AR2016 p37
Total Current Liabilities	$126.663m	(addition)

What we have here is an on paper 'theoretical' current shortfall of:

$126.663m - $90.911m = $35.752m

I say 'theoretical' because I have based this forecasted cashflow deficit on contracted maturity of financial receivables and historically negotiated repayment of bank borrowings. In fact many of these 'contracted receivables' can be rolled over, if a new car is bought on finance to replace the old one (for example). It is also true that the planned repayment of bank borrowings can be renegotiated and retimed. This means that the actual cash deficit will very likely much less than the $35.752m that I have predicted, if it exists at all.

However, if any of the shortfall remained, the difference could be:

1/ Much reduced if most/all of the TNRHA bonds, maturing on 30th September 2016, are rolled over into shares. This would be the equivalent of injecting up to $23.189m (AR2016 Note 24) of new cash into the company, while simultaneously reducing debt by the same amount.
2/ Selling $14.156m in stock from the Turners Fleet/Auction side of the business.
3/ Retaining half the expected earnings over the twelve month period 1st April 2016 to 31st March 2017. This is stated company policy, which based on the last six monthly period would see cash reserves boosted by: 0.5 x $8.162m x 2 = $8.162m.
4/ Increase borrowings from the banks, under variations to the current banking syndicate deal (amount undeclared and unknown, so I will leave this out of my analysis).

The test I am asking TNR to meet is a follows: Over the twelve months from balance date:-

[(Contracted Cash Inflow) + (Other cash Available)] > 1.1 x (Contracted Cash Outflow)

=> ($90.911m+$23.189m+$14.156m+$8.162m) > 1.1 x $126.663m
=> $136.418m > $139.329m (this is false)

The theoretical shortfall of $2.911m represents:

$2.911m/$167.598m = 1.74% of the end of year loan book balance

In summary, not a good result, but rather better than last year. The equation would have worked if it wasn't for the 10% margin required. So a 'fail' against a tough standard, but a close 'fail'.

SNOOPY

To ensure liquidity over the next twelve months, management has the ability to move resources between divisions. So despite this measure being of primary interest in sizing up financial companies, I believe it is more correct to study the TNR group as a whole. The current account information that I seek is in the FY2017 annual report, but it is scattered. Let's see what happens when I bring it all together again.

Financial Assets	0-12 months	Reference
Cash & Cash Equivalents	$69.069m	AR2017 p38
Financial Receivables Contractural Maturity	$99.349m	AR2017 p62
Reverse Annuity Mortgages	$1.892m	AR2017 p65 Note 16
Total Current Resources	$170.310m	(addition)
Financial Liabilities	0-12 months	Reference
Current Liabilities	$18.750m+$50.998m	AR2017 p51
Total Current Liabilities	$69.748m	(addition)

What we have here is an on paper 'theoretical' current shortfall of:

$69.748m - $170.310m = -$100.562m

A 'negative shortfall' is in fact a surplus, and that is superficially a very healthy position to be in with this test's twelve month (current) time horizon.
I say 'theoretical' because I have based this forecasted cashflow deficit on contracted maturity of financial receivables and historically negotiated repayment of bank borrowings. In fact many of these 'contracted receivables' can be rolled over, if a new car is bought on finance to replace the old one (for example). It is also true that the planned repayment of bank borrowings can be renegotiated and retimed. This means that the actual cash surplus will very likely be greater than the $100.562m that I have predicted.


The test I am asking TNR to meet is a follows: Over the twelve months from balance date:-

[(Contracted Cash Inflow) + (Other cash Available)] > 1.1 x (Contracted Cash Outflow)

=> ($170.310m + $'X'm) > 1.1 x $69.178m
=> $170.310m > $76.096m (this is true)

The theoretical extra cash available " $ 'X'm from a net sell down of car inventory and retaining more earnings rather than paying dividends I haven't even bothered to calculate this year. The contracted cash position is so strong that it would be a waste of time showing that even more cash could be raised.

This is a huge turnaround from FY2016, and a very strong 'pass'

SNOOPY

[BlackPeter]

To ensure liquidity over the next twelve months, mangement has the ability to move resources between divisions. So despite this measure being of primary interest in sizing up financial companies, I believe it is more correct to study the TNR group as a whole. The current account information that I seek is in the FY2017 annual report, but it is scattered. Let's see what happens when I bring it all together again.

Financial Assets	0-12 months	Reference
Cash & Cash Equivalents	$69.069m	AR2017 p38
Financial Receivables Contractural Maturity	$99.349m	AR2017 p62
Reverse Annuity Mortgages	$1.892m	AR2017 p65 Note 16
Total Current Resources	$170.310m	(addition)
Financial Liabilities	0-12 months	Reference
Current Liabilities	$115.679m+$10.984m	AR2016 p37
Total Current Liabilities	$126.663m	(addition)

What we have here is an on paper 'theoretical' current shortfall of:

$126.663m - $90.911m = $35.752m

I say 'theoretical' beacuse I have based this forecasted cashflow deficit on contracted maturity of financial receivables and historically negotiated repayment of bank borrowings. In fact many of these 'contracted recievables' can be rolled over, if a new car is bought on finance to replace the old one (for example). It is also true that the planned repayment of bank borrowings can be renegotiated and retimed. This means that the actual cash deficit will very likely much less than the $35.752m that I have predicted, if it exists at all.

However, if any of the shortfall remained, the difference could be:

1/ Much reduced if most/all of the TNRHA bonds, maturing on 30th September 2016, are rolled over into shares. This would be the equivalent of injecting up to $23.189m (AR2016 Note 24) of new cash into the company, while simutaneously reducing debt by the same amount.
2/ Selling $14.156m in stock from the Turners Fleet/Auction side of the business.
3/ Retaining half the expected earnings over the twelve month period 1st April 2016 to 31st March 2017. This is stated company policy, which based on the last six monthly period would see cash reserves bossted by: 0.5 x $8.162m x 2 = $8.162m.
4/ Increase borrowings from the banks, under variations to the current banking syndicate deal (amount undeclared and unknown, so I will leave this out of my analysis).

The test I am asking TNR to meet is a follows: Over the twelve months from balance date:-

[(Contracted Cash Inflow) + (Other cash Available)] > 1.1 x (Contracted Cash Outflow)

=> ($90.911m+$23.189m+$14.156m+$8.162m) > 1.1 x $126.663m
=> $136.418m > $139.329m (this is false)

The theoretical shortfall of $2.911m represents:

$2.911m/$167.598m = 1.74% of the end of year loan book balance

In summary, not a good result, but rather better than last year. The equation would have worked if it wasn't for the 10% margin required. So a 'fail' against a tough standard, but a close 'fail'.

SNOOPY

Hmm - not sure whether this "liquidity buffer" test makes in TRA's context a lot of sense. TRA is increasing its financial branch - i.e. in parts moving their balance sheet towards a banking type operation. How many banks do you know which would have enough liquidity to pay all their "current" liabilities (i.e. less than 12 months dues date) without the need to take on some new (or rolled over) liabilities?

Wouldn't we call this a (very) lazy balance sheet?

[Snoopy]

Hmm - not sure whether this "liquidity buffer" test makes in TRA's context a lot of sense. TRA is increasing its financial branch - i.e. in parts moving their balance sheet towards a banking type operation. How many banks do you know which would have enough liquidity to pay all their "current" liabilities (i.e. less than 12 months dues date) without the need to take on some new (or rolled over) liabilities?

Wouldn't we call this a (very) lazy balance sheet?

As usual BP you are far too 'on the ball' and 'sharp on the mark' for me!

You ask
"How many banks do you know which would have enough liquidity to pay all their "current" liabilities?"

If you look at the finished post you referenced, (not the one of mine that was half baked in the oven when you quoted it), you will see that that Turners easily cover their 'current' liabilities from contracted liquidity that is coming due. That has to be very reassuring for shareholders and bondholders.

The 'problem', if you choose to see it as such, is the longer term resilience position as outlined in post 1481, titled 'Tier 1 and Tier 2 Lending Covenants FY2017'. What it comes down to is this.

If Turners management keep "doing what they say they will do" and keep delivering on results then there is no problem. But what happens if the car market slows?

Slower car sales mean less new finance contracts written and less new insurance business written. This would be a 'triple kick in the head' for Turners, and could result in goodwill write offs and an urgent capital injection need from shareholders. It wouldn't be a pretty picture and is the potential downside of the current growth strategy. I am not saying this scenario is likely. But I think investors should bear in mind that it is possible. The bare fact is the net tangible asset backing of TNR at balance date was:

($171.716 - $172.088) / 74.523m = -0.005c per share

The multi year asset value decline I have laid out in the table below

	Shareholder Funds {A}	Intangible Assets {B}	No.Shares on Issue {C}	NTA/share {{A}-{B}}/{C}
EOFY2015	$121.002m	$103.595m	63.077m	27.6c
EOFY2016	$129.812m	$118.106m	63.432m	18.4c
EOFY2017	$171.716m	$172.002m	74.532m	-0.4c

You read that right. Turners have negative tangible assets, all signed off by the auditors. No-one will mention this if things continue to go well. But actually Turners is a highly leveraged house of cards. You might not want to be in there if the automotive market catches a cool breeze.

SNOOPY

[Snoopy]

Turners is free to negotiate with its parent bankers on what is a suitable level of funding for the company. It seems inconceivable that they would negotiate their own loan package in a way that would put their own 'funding core' at risk. So we can use the information we have combined with a 'rule of thumb' to calculate an appropriate sized funding core.

The table below has taken items from the balance sheet (marked (1)). I have written the table with all the pieces adding up to a whole. However, the table has largely been constructed in a reverse way. That means starting with 'the whole' then figuring out a way to allocate 'the whole' to the separate constituent pieces.

	Assets		Liabilities		Shareholder Equity
Finance (Not Underlying)	$94.892m (3)	-	$85.403m (4)	=	$9.489m (6)
Underlying Finance	$167.592m (1)	-	$81.506m (5)	=	$86.090m (6)
Finance Sub Total	$262.488m (*)	-	$166.909m (*)	=	$95.579m (2)
Auctions & Fleet	$99.815m (*)	-	$65.582m (*)	=	$34.223m (2)
Balance Sheet Total (All)	$362.303m (1)	-	$232.491m (1)	=	$129.812m (1)

Calculation (3) allows us to work out the core assets not related the underlying finance contracts of the business (everything else apart from the receivables book) by simple subtraction. The finance company 'rule of thumb' for their core is to ensure that:

(Non-Risk Liabilities)/(Non-Risk Assets) < 0.9

From this, we can work out that the Non-Risk Liabilities must be no more than:

(Non-Risk Assets) x 0.9 = $94.892m x 0.9 = $85.403m (which is answer 4 above).

Simple subtraction and addition is then used to work out the rest of the numbers in the table.

So what's the point of this so far?

By working out the minimum size of the business core (as measured by assets and liabilities), that means we can measure how well the rest of the business is set up to do the customer lending, the bit that actually generates the profits for the Turners Finance division. This is done by looking at the assets and liabilities left outside the core.

Implied Available Financing Gearing ratio
= (At Risk Liabilities)/(At Risk Assets)
= $81.506m/$167.596m
= 48.6%

Generally you would want to match your 'At Risk Liabilities' with your 'At Risk Assets'. This particular match looks acceptably conservative. But how does it compare with other listed finance entities? Rather better than the 65.6% that I have calculated for 'Geneva Finance' as it turns out. In practical terms this means that Turners has the capacity to expand their finance business loan book at a greater rate than Geneva, without issuing new capital. Not saying I wouldn't buy Geneva. But on this measure TNR looks better, which is probably why it trades on a higher PE than Geneva.

SNOOPY

Turners is free to negotiate with its parent bankers on what is a suitable level of funding for the company. It seems inconceivable that they would negotiate their own loan package in a way that would put their own 'funding core' at risk. So we can use the information we have combined with a 'rule of thumb' to calculate an appropriate sized funding core.

The table below has taken items from the balance sheet (marked (1)). I have written the table with all the pieces adding up to a whole. However, the table has largely been constructed in a reverse way. That means starting with 'the whole' then figuring out a way to allocate 'the whole' to the separate constituent pieces.

	Assets		Liabilities		Shareholder Equity
Finance (Not Underlying)	$185.326m (3)	-	$166.793m (4)	=	$18.533m (6)
Underlying Finance	$207.143m (1)	-	$87.948m (5)	=	$119.195m (6)
Finance Sub Total	$392.469m (*)	-	$254.741m (*)	=	$137.728m (2)
Automotive Retail	$164.164m (*)	-	$130.176m (*)	=	$33.988m (2)
Balance Sheet Total (All)	$556.633m (1)	-	$384.917m (1)	=	$171.716m (1)

(*) These items are from my off-line 'segmented' spreadsheet. Assets/Liabilities are sized in proportion to segmented balance sheet information, but with eliminations and corporate costs apportioned between the 'automotive retail' and 'all other finance' divisions.

Calculation (3) allows us to work out the core assets not related the underlying finance contracts of the business (everything else apart from the receivables book) by simple subtraction. The finance company 'rule of thumb' for their core is to ensure that:

(Non-Risk Liabilities)/(Non-Risk Assets) < 0.9

From this, we can work out that the Non-Risk Liabilities must be no more than:

(Non-Risk Assets) x 0.9 = $185.326m x 0.9 = $166.793m (which is answer 4 above).

Simple subtraction and addition is then used to work out the rest of the numbers in the table.

So what's the point of this so far?

By working out the minimum size of the business core (as measured by assets and liabilities), that means we can measure how well the rest of the business is set up to do the customer lending, the bit that actually generates the profits for the Turners Finance division. This is done by looking at the assets and liabilities left outside the core.

Implied Available Financing Gearing ratio
= (At Risk Liabilities)/(At Risk Assets)
= $87.948m/$207.143m
= 42.5%

Generally you would want to match your 'At Risk Liabilities' with your 'At Risk Assets'. This particular match looks acceptably conservative. But how does it compare with other listed finance entities? Rather better than the 64.3% that I have calculated for 'Geneva Finance' for FY2017 as it turns out. In practical terms, one might take this to mean that Turners has the capacity to expand their finance business loan book at a greater rate than Geneva, without issuing new capital. Not saying I wouldn't buy Geneva. But on this measure TNR looks better, which might be one reason why it trades on a higher PE than Geneva.

SNOOPY

[Snoopy]

The report is out and the extra detail has been released. So it is time to look again at the comparison with Heartland. Turners do not disclose sufficient detail for half yearly comparisons. So it is only meaningful to compare annual periods. And even then, because there are only three data points, none of this will stand up to any really rigorous statistical analysis. But let's do it anyway!

Another year goes by and now we have four separate annual perspectives to consider.

Turners
Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Impaired Asset Expense (V)	Write Off (W)	Gross Financial Receivables (Z)	(V)/(Z)	(W)/(Z)
EOFY2014	$2.960m	$37.692m	7.85%	-$0.532m	-$1.452m	$43.212m	1.23%	3.36%
EOFY2015	$3.182m	$143.365m	2.22%	-$1.607m	-$1.375m	$150.351m	1.07%	0.94%
EOFY2016	$5.129m	$168.889m	3.04%	-$1.041m	-$1.041m	$175.675m	0.59%	0.59%
EOFY2017	$1.331m	$207.143m	0.64%	-$2.025m	-$1.442m	$213.130m	0.95%	0.68%
Total				-$5.205m	-$5.310m
Average							0.96%	1.39%

'Stressed Loans' in the context of Turners as follows (figures given are calculations from the Annual Report of that Year, 'b' being a subsequent year retrospective):

Financial Year	2014b	2015	2016	2017
Impaired Loans Past due for 90+ days	$4.740m	$5.572m	$5.939m	$3.516m
plus Impaired Loans Less than 90 days due	$0m	$0m	$0.461m	$0.485m
plus Not Impaired Loans Past due for 90+ days	$3.637m	$4.012m	$4.417m	$2.583m
plus Not Impaired Loans Past due for 60 to 90 days	$0.103m	$0.584m	$1.088m	$0.775m
less Specific Impairment Provision	-$2.061m	-$2.505m	-$1.952m	-$0.973m
less Collective Impairment Provision	-$3.459m	-$4.481m	-$4.824m	-$5.055m
equals Total	$2.960m	$3.182m	$5.129m	$1.331m

Heartland
Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Impaired Asset Expense (V)	Write Off (W)	Gross Financial Receivables (Z)	(V)/(Z)	(W)/(Z)
EOFY2013	$48.974m	$1,961.402m	2.50%	-$22.567m	-$13.660m	$2,060.867m	1.10%	0.66%
EOFY2014	$49.654m	$2,566.039m	1.94%	-$5.895m	-$38.518m	$2,631.754m	0.22%	1.46%
EOFY2015	$39.066m	$2,829.246m	1.38%	-$12.105m	-$4.891m	$2,893.724m	0.42%	0.17%
EOFY2016	$37.851m	$3,113.957m	1.21%	-$13.501m	-$18.663m	$3,140.105m	0.43%	0.59%
EOFY2017 (*)	$38.324m	$3,545.897m	1.08%	-$15.015m	-$11.671m	$3,575.613m	0.42%	0.33%
Total				-$40.567m	-$57.069m
Average							0.52%	0.64%

(*) Results listed from EOY Disclosure Statement, pending the release of the full annual report.

'Stressed Loans' in the case of Heartland are defined as follows:

Financial Year	2013	2014	2015	2016	2017
Loans at least 90 days past due	$26.598m	$34.034m	$34.975m	$21.967m	$35.629m
plus Loans individually impaired	$69.301m	$27.617m	$25.622m	$33.764m	$28.578m
plus Restructured Assets	$3.566m	$4.064m	$3.881m	$3.281m	$0m
less Provision for Impairment	-$50.491m	-$16.061m	-$25.412m	-$21.161m	-$25.865m
equals Total	$48.974m	$49.654m	$39.066m	$37.851m	$38.324m

UDC
Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Impaired Asset Expense (V)	Write Off (W)	Gross Financial Receivables (Z)	(V)/(Z)	(W)/(Z)
EOFY2013	$86.887m	$2,161.193m	4.02%	-$7.123m	-$12.339m-$3.745m	$2,198.653m	0.32%	0.73%
EOFY2014	$95.444m	$2,344.131m	4.07%	-$11.733m	-$18.633m+$3.300m	$2,375.936m	0.49%	0.65%
EOFY2015	$82.267m	$2,429.695m	3.39%	-$10.427m	-$12.162m-$0.659m	$2,421.224m	0.43%	0.53%
EOFY2016	$85.475m	$2,721.710m	3.14%	-$7.418m	-$11.055m+$1.297m	$2,750.619m	0.27%	0.35%
Total				-$36.701m	-$53.996m
Average							0.38%	0.57%

Financial Year	2013	2014	2015	2016
Take loan total from categories 7 and 8	$87.054m	$92.366m	$81.156m	$96.727m
add 'Default' loans	$37.293m	$34.883m	$32.640m	$17.657m
less Provision for Credit Impairment	-$37.46m	-$31.805m	-$31.529m	-$28.909m
equals Total	$86.887m	$95.444m	$82.267m	$85.475m

SNOOPY

[blackcap]

I am a happy TRA holder since the DPC days but do have a question I may pose at the next AGM.

That is what contingency if any do TRA have for the ever changing automotive market and how do they see their business model operate when people do not own cars anymore but "hire" them. ie I am thinking an autonomous world where ownership is no longer possible (could be as little as 15-20 years away) (or ownership is possible but not economically viable)

[silverblizzard888]

I am a happy TRA holder since the DPC days but do have a question I may pose at the next AGM.

That is what contingency if any do TRA have for the ever changing automotive market and how do they see their business model operate when people do not own cars anymore but "hire" them. ie I am thinking an autonomous world where ownership is no longer possible (could be as little as 15-20 years away) (or ownership is possible but not economically viable)

Great question, if Elon Musk gets his way we will be seeing level 5 autonomous driving cars in 2 years, won't be long till Uber adopts them after that and in as little as 5 years we could see driverless Ubers driving us around for a fraction of the current taxi prices then it would be cheaper not to have a car. How does Turners adapt is indeed a good question.
https://electrek.co/2017/04/29/elon-...omous-driving/

[BlackPeter]

I am a happy TRA holder since the DPC days but do have a question I may pose at the next AGM.

That is what contingency if any do TRA have for the ever changing automotive market and how do they see their business model operate when people do not own cars anymore but "hire" them. ie I am thinking an autonomous world where ownership is no longer possible (could be as little as 15-20 years away) (or ownership is possible but not economically viable)

Fair question - though I'd think that this (15 to 20 years) is a time horizon not too many companies plan for ... and particularly in NZ (low population density) the adaption will take longer ...

[Brain]

I will be cashed up totally in 15 to 20 years time or dead. Not a time frame that I am concerned about. Probably applies to a lot of board members as well. So good luck with that question

[McGinty]

Have been re-looking in to TRA lately and consider this to be one of the better investment options on the NZX at current prices.

Using the information provided in their July 27 presentation, the company looks to have the perfect mix of growth, dividend and currently valued at an attractive multiple.

Using the lower of the FY18 Analysis guidance figures of NPBT of $29m (NPAT of $20.9m), I have EPS growth of 18.6% at a FY18 P/E of 12.43. Looks like a bargain when considering most of the flat or no growth companies trading at higher multiples.

I'm unsure why this is so unloved at the moment (maybe overhead resulting from the Hugh Green sell down at a good discount), but I have been topping up at $3.57 & $3.49 and happy to receive the quarterly dividends growing every year.