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

[Snoopy]

The gearing ratio in based on the underlying debt of the company, calculated by stripping out the already contracted future liabilities (from AR2015 Balance Sheet p32) eventually payable to insurance policy holders on the balance sheet. I have additionally removed the deferred revenue ($7.476m) from these underlying liabilities

$207.970m -($9.260m + $16.378m + $7.476m) = $174.850m

Likewise on the asset side of the balance sheet we have to strip the third party 'finance receivables' from the total company assets. From the Balance Sheet.

$328.972m - $142.827mm = $186.145m

Gearing Ratio = Underlying Liabilities/Underlying Assets = $174.850m/$186.145m = 94% > 90%

=> Fail Test

The big spending Turner's acquisition of Oxford Finance (01-04-2014) and the old 'Turners Auctions' (28-10-2014) have greatly increased the gearing ratio of the formerly conservatively geared company!

The gearing ratio in based on the underlying debt of the company, calculated by stripping out the already contracted future liabilities (from HYAR2016 Balance Sheet p14) eventually payable to insurance policy holders on the balance sheet. I have additionally removed the deferred revenue ($7.476m) from these underlying liabilities

$224.099m (declared total liabilities ofthe company)
less $10.517m (life insurance contract liabilities)
less $15.498m (life investment contract liabilities)
less $7.587m (deferred revenue)

= $190.497m (effective snapshot of net debt)

Likewise on the asset side of the balance sheet we have to strip the third party 'finance receivables' from the total company assets. From the Balance Sheet.

$348.909m (total assets)
less $142.827mm (finance receivables)

= $184.473m (effective snapshot of unerlying company assets)

Gearing Ratio = Underlying Liabilities/Underlying Assets = $190.497m/$184.473m = 103% > 90%

=> Fail Test

Things look to be going in the wrong direction.

Six months on from the period in which Oxford Finance (01-04-2014) and the old 'Turners Auctions' (28-10-2014) were acquired, the greatly increased the gearing ratio of the formerly conservatively geared company has increased even further.

Borrowing money to significantly increase the size of the loan book while the asset base remains steady is a risk factor that should not be underestimated by shareholders!

SNOOPY

[Snoopy]

Updating for the FY2015 financial year (ended 31-03-2015)

The underlying interest expense is shown under note 7 (AR2015) to be $7.381m.

The underlying EBIT is a bit more complicated. There is a $7.058m gain recorded because of the write up in the value of the then Dorchester's existing stake in TUA to 'market bid value' level. But the market bid was made my Dorchester. So Dorchester have in effect bid up the value of their pre-owned TUA shares to a market level that they themselves have chosen. $7.058m is a one off self controlled capital gain that is not repeatable. IMO this should not be included in any underlying EBIT to Interest Expense ratio.

(EBT +Interest Expense)/(Interest Expense) = [($18.264m-$7.058m)+$7.381m]/$7.381m = 2.52 > 1.2

=> Pass Test

Updating for the HY2016 financial year (ended 30-09-2015)

The underlying interest expense is shown in the 'Condensed Consolidated Statement of Comprehensive Income' (p12 HYAR2016 to be $5.722m.

The underlying EBIT may be found in the same statement by taking the 'Profit Before Taxation' (EBT) and adding back the interest expense (I).

(EBT +Interest Expense)/(Interest Expense) = [$10.260m+$5.772m]/$5.772m = 2.78 > 1.2

=> Pass Test

'Post Calculation Thought'
It strikes me that by passing this test so easily, the profit margins at TNR must be generally higher than the finance industry norm. Given this, perhaps the 'failures' in the two previous tests are not as much of a concern as I previously considered. Others Thoughts?

SNOOPY

[Snoopy]

The current account information that I seek is still in the FY2015 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	$12.339m	AR2015 p32
Financial assets at value thru P&L	$0.877m	AR2015 p43
Financial Receivables Contractural Maturity	$74.174m	AR2015 p53
Reverse Annuity Mortgages	$1.603m	AR2015 Note 16
Other Receivables	$4.616m	AR2015 Note 17
Total Current Resources	$93.609m	(addition)
Financial Liabilities	0-12 months	Reference
Current Liabilities	$79.629m+$37.539m	AR2015 p44
Total Current Liabilities	$117.168m	(addition)

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

$117.168m - $93.609m = $23.559m

Of course there are ways to make up this shortfall. Some of those account receivables could be rolled over into new business, thus making the 'theoretical' shortfall disappear.

If any of the shortfall remained, the difference could be borrowed under the company's banking facilities. However, information on the capacity of spare banking facilities available is not listed in the annual report. In summary, not a good result compared to the strong cash positive position of last year. The contractual cash deficit position of TNR is substantial, greater than the (record) full year profit in FY2015 of $18.5m!

Financial Assets	0-12 months	Reference
Cash & Cash Equivalents	$13.019m	HYAR2016 p14
Financial assets at value thru P&L	$0.365m	HYAR2016 p23
Financial Receivables Contractural Maturity	$?m	n/a
Reverse Annuity Mortgages	$?m	n/a
Other Receivables	$?m	n/a
Total Current Resources	$?m	(insufficient information)
Financial Liabilities	0-12 months	Reference
Current Liabilities	$?m	n/a
Total Current Liabilities	$?m	(insufficient information)

I am putting up the above table to show shareholders how much information is missing to allow any conclusions to be reached. IMO this is very poor disclosure, only a few years on from when the finance sector in NZ collapsed. Granted this company is not funded by public deposits. But in my mind, not providing enough information in the accounts to allow even a 'quick ratio' (current assets to current liabilities) to be calculated is disgraceful in 2016. I guess shareholders need to 'believe the story'?

SNOOPY

PS nothing published on the structure of company bank loans either!

[percy]

Banks lend money long term.
Finance companies lend money for short term periods.
Auction houses such as Turners often require no capital for stock.They sell your art work,car,equipment for commission.
Car sales companies,such as TNR buy cars from Japan and sell them.
So to fully understand TNR you need to realise that this is a very different business to ANZ Bank or Heartland Bank.
What drives their profit is margins and add ons,and how quickly they can turn stock over,and their impairment costs.
They therefore can be "safe" with lower equity.
A business turning over their stock say 8 times a year requires considerable less capital than a business turning stock over 3 times a year.
TNR auction business is a very clever business,which drives all the add ons.
You can see the real difference if you compared Smith's City with TNR.Smiths City sales on finance drive Smiths Finance,and the profits at SCY are in the finance company.However they can't do the add ons TNR do.The other point is SCY store can't do the stock turns and don't have the margins.

[Snoopy]

Banks lend money long term.
Finance companies lend money for short term periods.
Auction houses such as Turners often require no capital for stock.They sell your art work,car,equipment for commission.
Car sales companies,such as TNR buy cars from Japan and sell them.
So to fully understand TNR you need to realise that this is a very different business to ANZ Bank or Heartland Bank.
What drives their profit is margins and add ons,and how quickly they can turn stock over,and their impairment costs.
They therefore can be "safe" with lower equity.

Very good point Percy. I made my own reference to those 'higher profit margins' in post 1153. I probably need to extract the old 'Turners Auction Group' at least from the results to get anywhere near an apples with apples comparison with finance companies. Looks like I have some homework :-(!

SNOOPY

[Snoopy]

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' (HYAR2016, p14).

We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and we are looking for disclosed reserves defined as:

Tier 1 capital > 20% of the loan book.

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

Tier 1 Capital = (Shareholder Equity) - (Intangibles) - (Deferred tax)
= $125.810m - $105.145m - $5.310m
= $15.355m

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': $15.910m
2/ 'Finance Receivables': $164.436m
3/ 'Receivables and deferred expenses': $4.553m
4/ 'Reverse annuity mortgages': $11.878m

For the HY2016 year balance date these come to $196.771m

$15.355m / $196.771m = 7.8% < 20%

=> Fail test

Care needs to be taken in interpreting a result like this. The increase in Intangible Assets over the last six months (representing a business acquired over the period) needs to be considered. Southern Finance Limited was brought onto the books on 31st July 2015, just two months before the reporting period ended on 30th September 2015. .

From note 6 in the half year report, $1.677m of intangibles was brought onto the books with the acquisition of Southern Finance. The $1.677m is a measure of what Turners were prepared to pay over and above asset backing, because of the prospective profitability of the acquisition. Nevertheless $1.677m represents a minimal overall asset distortion to a company with over $100m of intangible assets on the books already. So I am judging the acquisition of Southern Finance, with a loan book of $9.5m, (under 6% of the total finance receivables loan book for TNR) , as not distortionary and hence not material for Tier 1 lending covenant purposes.

Put bluntly, while an improvement from the FY2015 position, I consider the capital behind this company is (still) insufficient for the size of the loan book.

My earlier attempt at this failed to consider that in financial services terms, 'Turners Limited' is now a 'hybrid' company. Turners (TNR) now comprises what was the old Turners Auctions business (TUA), plus the debt collection service division, plus the finance and insurance services division. I need to extract the non-finance bits before I stack up 'Turners Finance' againast my finance company yardsticks.

Once again 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 or derived from in the 'Consolidated Statement of Financial Position' (HYAR2016, p14) and information on intangibles relating to TUA in AR2015.

	Total Tier 1 Equivalent Equity	$125.78m
less	Intangibles (excl. TUA)	$36.89m
less	Deferred Tax	$5.31m
less	Auctions Equity	$5.99m
less	Fleet Equity	$1.53m
less	Collection Services NZ Equity	$5.54m
less	Collection Services Aus Equity	$0.16m
	Underlying Financial Group Equity	$70.56m

This equity is supporting the following loan assets on the books.

	Investment Bonds/Funds at fair value	$15.91m
plus	Finance Company Receivables	$164.44m
plus	Receivables and Deferred Expenses	$4.55m
plus	Reverse Annuity Mortgage Loans	$11.87m
	Total Loan Assets on Books	$196.77m

So: Underlying Financial Group Equity / Total Loan Assets on Books

= $70.56m/ $196.77m = 36% > 20% => pass test

The principal difference between this calculation and the first iteration is that all the intangible assets related to the TUA acquisition, which arose because TUA was so profitable (a good thing), have been ring fenced out of the calculation.

SNOOPY

[Snoopy]

The gearing ratio in based on the underlying debt of the company, calculated by stripping out the already contracted future liabilities (from HYAR2016 Balance Sheet p14) eventually payable to insurance policy holders on the balance sheet. I have additionally removed the deferred revenue ($7.476m) from these underlying liabilities

$224.099m (declared total liabilities ofthe company)
less $10.517m (life insurance contract liabilities)
less $15.498m (life investment contract liabilities)
less $7.587m (deferred revenue)

= $190.497m (effective snapshot of net debt)

Likewise on the asset side of the balance sheet we have to strip the third party 'finance receivables' from the total company assets. From the Balance Sheet.

$348.909m (total assets)
less $142.827mm (finance receivables)

= $184.473m (effective snapshot of unerlying company assets)

Gearing Ratio = Underlying Liabilities/Underlying Assets = $190.497m/$184.473m = 103% > 90%

=> Fail Test

Things look to be going in the wrong direction.

Six months on from the period in which Oxford Finance (01-04-2014) and the old 'Turners Auctions' (28-10-2014) were acquired, the greatly increased the gearing ratio of the formerly conservatively geared company has increased even further.

Borrowing money to significantly increase the size of the loan book while the asset base remains steady is a risk factor that should not be underestimated by shareholders!

Once again we want to back the equity and liabilities of businesses not related to finance out of the TNR finance division calculations.

	Total Debt	$224.09m		Total Assets	$349.87m
			less	Finance Receivables	$164.44m
less	Auctions Liabilities	$16.77m	less	Auctions Assets	$22.75m
less	Fleet Liabilities	$4.42m	less	Fleet Assets	$5.96m
less	Collection Service NZ Liabilities	$8.24m	less	Collection Service NZ Assets	$13.79m
less	Collection Service Aus Liabilities	$0.69m	less	Collection Service Aus Assets	$0.85m
less	Life Insurance Contract Liabilities	$10.52m
less	Life Investment Contract Liabilities	$15.50m
less	Deferred Revenue	$7.57m
	Underlying Financial Group Liabilities	$160.38m		Underlying Financial Group Assets	$142.09m

Underlying Financial Group Liabilities/Underlying Financial Group Assets

= $160.38m/ $142.09m

= 113% > 90% => fail test

In this instance, ring fencing off the old TUA and Receivables Managment business assets and liabilities has made the result worse!

SNOOPY

[Snoopy]

Updating for the HY2016 financial year (ended 30-09-2015)

The underlying interest expense is shown in the 'Condensed Consolidated Statement of Comprehensive Income' (p12 HYAR2016 to be $5.722m.

The underlying EBIT may be found in the same statement by taking the 'Profit Before Taxation' (EBT) and adding back the interest expense (I).

(EBT +Interest Expense)/(Interest Expense) = [$10.260m+$5.772m]/$5.772m = 2.78 > 1.2

=> Pass Test

'Post Calculation Thought'
It strikes me that by passing this test so easily, the profit margins at TNR must be generally higher than the finance industry norm. Given this, perhaps the 'failures' in the two previous tests are not as much of a concern as I previously considered. Others Thoughts?

I have found it necessary to do a lengthy deconstruction and reconsolidation of divisional earnings so that I can fully separate EBIT from the 'Finance Section' of TNR from all other earnings divisions of TNR. Head office costs have been farmed out amoongst the various company segments on the basis of segment revenue to totaldivisional revenue..

(EBT +Interest Expense)/(Interest Expense) = [$6.42m+$4.78m]/$4.78m = 2.34 > 1.2

=> Pass Test

Note this pass figure has been reduced from the previous iteration principally becasue because the highly profitable 'Auctions' and 'Fleet' businesses (formerly TUA) have been removed from the calculation.

SNOOPY

[Snoopy]

The finance division of TNR should be watched carefully. If it becomes badly run, the viability of the whole company could be at stake. Of concern to shareholders should be the weak gearing ratio. Nevertheless this weakness is offset by the very high underlying profitability of the loans apparent in the EBIT to Interest expense test. Put simply IMO, because underlying profitability is so good , the balance sheet is being stretched a little more than an average finance company might allow as prudent. This trade off is working - for now.

Of concern is the very poor disclosure on loan maturity vs bank loan maturity in the half year results. There is more than adequate disclosure in the previous period full year results. Disclosure on other matters in the half year report is generally good. So it is puzzling to me why this very useful information has been omitted in the half year report. Maybe TNR management could hire a well known rugby player or newsreader, and have him appear on a TV ad campaign saying the company is 'solid as'. That would probably fix any doubts that we minion shareholders have ;-P!

SNOOPY

[Snoopy]

The operating margin figure for FY2014 can now be calculated:

$4.171m / $31.327m = 13.3%

From the previous 30th April 2014 press release:

-----

Dorchester CEO, Paul Byrnes, said the profit from the three trading operations is expected to come in at around $6.5 million.

“Additionally, there will be two extraordinary items that will have the net effect of increasing the net profit after tax to around $8 million."

-----

The headline profit came in above guidance at $8.210m. But the operating profit was only $4.892m, a substantial fall on the $6.5m projected weeks earlier. Did DPC substantially underperform, then write back some more tax benefits than planned to mask this fact?

Not according to the 30th April 2014 press release.

-----

The second item results from bringing approximately $11 million of tax losses on to the balance sheet, resulting in a positive impact on profit of around $3.1 million.

------

Actual taxation benefits brought on board were $3.225m, which is close enough to the $3.1m projected.

Also brought on board in the previous half year was the bringing forward of interest payments due on capital notes converted early to shares. This is listed as a $1.669m loss and comes in as part of the operating loss. I think this is misleading as this payment is not part of normal operations. The operating profit is more correctly:

$4.892m + $1.669m = $6.561m

Interesting that that figure does line up with the 30th April 2014 forecast!

So the 'real' margin ( NPAT/revenue )for FY2014 was:

$6.561m / $31.327m = 20.9%

That figure is boosted by DPC paying no income tax because of previous losses. But it is still a good figure.

Updating for the FY2015 financial year.

The profit figure includes a 'write up' in value of $7.058m. This represents the existing pre-takeover TUA stake that was subject to TNR's own takeover. This is a one off self generated event that is not part of normal business 'margin.' So I have removed it from the calculation.

Tax paid over the year was $0.956m. This is less than the statutory rate, because TNR is still using up tax losses.

Margin = NPAT / Revenue

= [($19.006m-$7.058m) - $0.956m] / $89.498m

= 12.3%

That is quite a bit down on FY2014. But due to the transitional nature of what is a transforming business it is not a fair apples with apples comparison.

SNOOPY