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

[Snoopy]

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.

A drop in margin for the half year result.

Margin = NPAT / Revenue

= $7.440m / $89.498m

= 8.85%

SNOOPY

[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.
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.
<snip>

A drop in margin for the half year result.

Margin = NPAT / Revenue

= $7.440m / $89.498m

= 8.85%

When someone on the forum comes up with a general view, such as Percy above, I always like to see if the numbers back them up. The continuing decline in overall business Margin is a worry and suggests that far from being clever, TNR could be moving in the wrong direction. But sometimes a simple numerical analysis, such as I did above, does not tell the whole story.

I have been through those half year results and derived 'separate divisional results', as below:

	EBIT (reallocated)	Interest (reallocated)	Tax (calculated)	NPAT	Revenue	Margin
Auction & Fleet	$2.65m	$0.70m	$0.55m	$1.41m	$59.10m	2.38%
Debt Collection Services	$2.18m	$0.29m	$0.53m	$1.36m	$10.50m	12.91%
Finance & Insurance	$11.20m	$4.78m	$1.80m	$4.62m	$20.57m	22.47%

This shows that far from the finance margin decreasing, the company's finance division is operating at a far higher margin than even the 20.9% achieved in 2014. The more detailed numbers don't lie. It looks like Percy is dead right. But unlike in the TUA days (for former TUA shareholders), it is now the Auction & Fleet wehicle business which is the add on!

SNOOPY

[Snoopy]

I have been through those half year results and derived 'separate divisional results', as below:

	EBIT (reallocated)	Interest (reallocated)	Tax (calculated)	NPAT	Revenue	Margin
Auction & Fleet	$2.65m	$0.70m	$0.55m	$1.41m	$59.10m	2.38%
Debt Collection Services	$2.18m	$0.29m	$0.53m	$1.36m	$10.50m	12.91%
Finance & Insurance	$11.20m	$4.78m	$1.80m	$4.62m	$20.57m	22.47%

One more comparison of interest to write up. Below is the TUA result for the period January 2014 to July 2014, the last clear six months before takeover activity.

	EBIT (declared)	Interest (no term debt)	Tax (calculated)	NPAT	Revenue	Margin
Auction & Fleet	$2.02m	$0.00m	$0.57m	$1.45m	$45.83m	3.17%
Finance (TUA only)	$0.91m	$0.00m	$0.25m	$0.65m	$3.81m	17.16%

You can see that since Dorchester/TNR has assumed control revenue has gone up significantly, as has EBIT, but NPAT has barely changed. This is almost entirely due to the interest bill that the old TUA now faces. TUA as a (relatively) small stand alone operation was run largely bank debt free. TNR has now loaded that outfit up with debt and redeployed some of the capital released into the loans business.

As a new larger business, not so heavily tied to one market, this change is probably sound financial sense. But it does show that TNR is not much like the old TUA. It is a far more agressively run company, with all the increase in potential rewards and risks that this statement implies.

SNOOPY

[percy]

As a new larger business, not so heavily tied to one market, this change is probably sound financial sense. But it does sho wthat TNR is not much like the old TUA. It is a far more agressively run company, with all the increase in potential rewards and risks that this statement implies.

SNOOPY

I think this is a very true comment.
So a great company in the right sector at the right time, means a rewarding investment for TNR shareholders..

[Snoopy]

I think this is a very true comment.
So a great company in the right sector at the right time, means a rewarding investment for TNR shareholders..

Quite right Percy. But you missed out the increased downside risk in TNR. To measure this, I like to use the 'Minimum (Underlying) Debt Repayment Period' or MDRP for short.

Total borrowings on the half year balance sheet were $168.948m
Cash on hand is $13.019m

The half annual profit was $7.440m. Multiply that my two to annualize earnings.

So the theoretical 'Minimum Debt Repayment Time', which assumes all profit is put towards the paying off of net debt is:

MDRT = ($168.948m - $13.019m) / (2 x $7.440m) = 10.5 years

Anything over ten years I regard as high. So this figure is at the 'low' end of 'high'. Not really a surprise for a company that is workings its balance sheet hard. Not a real concern for a company at this stage of its positive growth path either. Nevertheless this is a figure to keep an eye on.

SNOOPY

[Snoopy]

Without wishing to start a flame war, I will stick to what is indisputable.

When Heartland made a significant acquisition they had to go back to their shareholders for more money. When Dorchester made a significant acquisition they opened their war chest of cash and just bought it.

Dorchester currently operates a higher margin business than Heartland.

Pay $1 for Heartland shares and you get around $1 worth of underlying assets.
Pay $1 for Dorchester shares and you get only 30c worth of underlying assets.

One line summary: Dorchester is the better run business as of now (EOFY2014). But Heartland looks to be, superficially at least, the better value buy.

discl: hold neither, still evaluating both

An update from 3rd June 2014. I am now a Dorchester, um I mean Turners shareholder! This came about through being a shareholder in the 'other' Turners (TUA) that was taken over by Dorchester, with the combined group being renamed TNR. However, most of my association with TNR is through owning their bonds which mature later this year. So a big decision is coming up.

1/ Do I redeem the bonds for cash, and sell out my token TNR holding at the same time?
2/ Do I transfer my holding to a 'better'(?) finance investment like Heartland?
3/ Do i convert my TNR bonds to TNR shares and continue holding?

To answer this question I need to do a 'head to head' analysis with Heartland to see how the two stack up 'side by side'.

SNOOPY

[percy]

Owing each 'side by side' works for me.!!! lol.

[Snoopy]

I need to do a 'head to head' analysis with Heartland to see how the two stack up 'side by side'.

This comparison is complicated by the fact that TNR is a fast evolving company. There has been relative stability over the last six month reporting period, with Southern Finance being acquired for $4.856m on 31st July 2015. But go back six months prior to that and there are so many changes that I have decided all previous figures must be regarded as historical interest only. The last six monthly reporting figures for TNR have been annualised to allow a better comparison with Heartland Bank.

I have done my own analysis breaking down the NPAT performance of TNR into divisions. This has become necessary because TNR is really a hybrid company now, with the very substantial Turners Auctions business a full subsidiary. That means a straight HBL vs TNR comparison would be in some instances misleading.

A further complication is that the time periods are not strictly comparable, because of the different end of year balance dates of each company. The most recent to report was Turners for the half year ended 30th September 2015. The loan book balances I have used in my later calculation table are shown below.

	Heartland	Turners (Finance Division)
Loan Book 30-06-2014	$2,607.393m	N/A
Loan Book 31-03-2015	N/A	$142.827m
Loan Book 31-06-2015	$2,862.070m	N/A
Loan Book 31-09-2015	N/A	$164.386m

And here are the results of the calculations....

	Heartland FY2015	Turners Limited 2x1HY2016	Turners Limited (Finance Divisions Only) 2x1HY2016
Share Price	$1.12	$0.28	N/A
Total Shares on Issue	473.674m	630.765m	N/M
Earnings Per Share (annual impairment charge removed)	12.0c	2.3c	N/M
Net Dividend (historical)	3.0c+4.5c	0.6c+0.6c	N/M
Gross Dividend (historical)	10.4c	1.2c (no imputation credits available)	N/M
Gross Yield (historical)	9.3%	4.3%	N/M
PE Ratio (historical)	9.33	12.0	N/A
ROE (averaged equity)	12.2%	12.0%	11.8%
EBIT /(Loan Book {averaged})	7.0%	N/M	12.8%
Minimum Debt Repayment Time (MDRT)	12.2 years	10.6 years
Impaired Loans / Total Loans	0.57%		3.9%
Impaired Loans / Shareholder Equity	3.4%	5.2%	8.3%

SNOOPY

[Snoopy]

	Heartland	Turners Limited	Turners Limited (Finance Divisions Only)
Minimum Debt Repayment Time (MDRT)	12.2 years	10.6 years

I would class the indebtedness of both companies as medium to high. This statiistic I have derived from taking the underlying borrowings (that means leave out customer deposits), and divide them by a normalised earnings figure.

For Heartland the calculation is like this (borrowings broken down under note 13 of Heartland annual report)

[($3.378m + $465.773m +$258.630m)-$37.012] / ($48.169m +0.72($12.105m) ) = 12.2 years

You will notice that Heartland's earnings have been boosted by $12.105m of impairment charges that I have added back in. If I had not done this, then the MDRT woudl have blown out to 14.3 years!

For Turners the annualized calculation is like this:

($168.948m - $13.019m) / 2( $7.432m - $0.042) = 10.6 years

In this case there was a small impairment recovery of $42,000. I have removed this from the profit.

Put bluntly, I am not happy with either of these results. But Heartland, despite what Mr Wheeler has agreed to is looking distinctly overleveraged. Also remember the Heartland balance date of 30th June 2015 was before the worst effects of the dairy price collapse were apparent. If I was a Heartland shareholder, I'd be worried right now.

Conclusion: Turners win round one of our head to head contest.

SNOOPY

[Jinx]

And as a Turners shareholder you are still worried but slightly less so? That's reassuring at least