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

[winner69]

I am making a few assumptions below. But nevertheless I expect the figures to be 'ball park'.

Buy Right Cars advertise 2,000 cars in stock. So 2,000 x $10,000m = $20m to be paid for stock.

$15.3m x 0.78 = $11.9m in the cash settlement for the business.

So total cash to be paid for the business is $31.9m

The remainder payment for the business excluding stock is: $15.3m - $11.9m = $3.4m to be paid in TNR shares. Assuming these are issued at $2.80 (roughly the moving average price for CY2016) , this means:

$3.4m/$2.80 = 1.2m new TNR shares will be issued.

EBIT increase forecasted at $4.1m under the first year of ownership.

$4.1m/1.2m = $3.40 EBIT per share for all of those new shares issued.

Operating profit (EBT) last year was $21.551m. Add back in the interest expense of $11.436m and I get an EBIT of $32.987m. No. shares on issue at last balance date was 63.431m (adjusted for post 10:1 consolidation).

Current EBIT per share was therefore:

$32.987m / 63.431m = 52cps

On a per share EBIT for FY2016 basis then, this acquisition looks rather spectacular!

SNOOPY

So on a weighted basis EBIT/share is up 10% - yes passes the eps accretive test

Does the bit about the bank funding being agreeable to Turners mean they taking on debt?

[percy]

Added to my holding at $3.10.

[black knat]

Added to my holding at $3.10.

Good on you Percy - very good buying at a PEG of significantly less than 1.

[Snoopy]

So on a weighted basis EBIT/share is up 10% - yes passes the eps accretive test

Before Acquisition (Historical): EBIT/ No. Shares = $32.987m/63.431m = 52.0cps

After Acquisition (projected): EBIT/ No. Shares = ($32.987m+ $4.1m)/(63.431m +1.2m) = 57.3cps

So yes, I agree with your assessment of a 10% normalised EBIT improvement Winner.

Does the bit about the bank funding being agreeable to Turners mean they taking on debt?

Turners seem very free about taking on debt. Yet, if they can keep increasing their eps, who is to say they are wrong in doing so?

Last year debt was funded on average at 4.97%.

I previously wrote:

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Buy Right Cars advertise 2,000 cars in stock. So 2,000 x $10,000m = $20m to be paid for stock.
$15.3m x 0.78 = $11.9m in the cash settlement for the business.
So total cash to be paid for the business is $31.9m

----

Therefore, the debt funding cost for the above should be:

$31.9m x 0.0497 = $1.6m

Take $1.6m from the forecast incremental EBIT and I get EBT of $2.5m. With tax at 28% that gives an incremental NPAT of $1.8m.

NPAT (Actual) FY2016 was $15.517m
NPAT (Forecast) FY2017 is $15.517m + $1.8m = $17.317m

So forecast eps is: $17.317m/ 64.631m = 26.8cps

At $3.20, this gives a PE of: 320/26.8 = 12.0

And this is assuming a static year for all the rest of the business! $3.20 looks not overpriced I think, given the trajectory of the company.

SNOOPY

discl: shareholder, bondholder

[black knat]

How are we going on the bonds Snoopy? Are you still happy you took them in exchange for you old Turners shares?

[Snoopy]

How are we going on the bonds Snoopy? Are you still happy you took them in exchange for you old Turners shares?

If you do the calculations black knat, I have been both 'in the money' and 'out of the money' at various times. I don't bother doing the calculation any more. Because the whole point of owning the bonds, as opposed to the head shares, is to virtually eliminate the downside risk while enjoying a higher yield than the shareholders. And the price for that is - probably - I miss out on some of the upside risk.

So yes, I am very happy to have taken the bonds for most of my TUA shares. But I am equally happy to have my 'token' DPC/TNR shareholding at the same time!

SNOOPY

[Snoopy]

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.

I am not sure TNR shareholders fully appreciate how brilliant the acquisition of the old Turners Auctions business has been for them (us). The last pre-takeover published full year result for "Auctions & Fleet" were published in the FY2013 financial year (ended 31st December 2013).

Turner's Auctions Underlying 'Fleet & Auction' Result (ye 31/12/2013)
EBT Auctions	$2.853m
EBT Fleet	$2.064m
EBT Total	$4.917m
Remove Interest Earned Contribution	-$0.553m
EBT Total Underlying	$4.364m
less tax at 28%	$1.221m
NPAT	$3.142m

It is very interesting to compare the above 'Fleet & Auction' result with the equivalent figure in the FY2016 TNR report. Note that
1/ 'Fleet & Auction' assets and liabilities for FY2013 have been reduced to 93.32% of the published figures of the whole TUA group, because 'Fleet & Auctions' represent 93.32% of the business by revenue.
2/ 'Fleet & Auction' assets and liabilities for FY2016 have been adjusted to remove eliminations and reallocate corporate and other assets and liabiliities in proportion to divisional revenue.

	Assets	Liabiliities	Shareholder Equity	Interest Expense	NPAT	ROE
Auctions & Fleet (FY2013)	$53.2m	$35.8m	$17.4m	$0m	$3.142m	18.0%
Auctions & Fleet (FY2016)	$99.8m	$65.6m	$34.2m	$3.23m	$4.44m	13.0%

On paper the ROE performance has deteriorated. However, 'Auctions & Fleet' have taken on a substantial interest bill since FY2013. Take that out and ROE has actually improved. Another way of thinking about this is to see that the new TNR management, by introducing debt to Finance & Auctions, has been able to pull capital out of that business and redeply it elsewhere within the Turners group. On an overall group basis, that 'Auctions & Fleet' capital is working much harder. Smart man, that Paul Byrnes!

SNOOPY

[Jinx]

The numbers you run Snoopy are fantastic to read through and reinforce my thoughts on TNR, thank you!

I'm so confused at how the SP is still sitting around $3 after constant good news like this.

[Snoopy]

I'm so confused at how the SP is still sitting around $3 after constant good news like this.

Ther is currently an arbitrage play going on with TNR and TNRHA. Those TNRHA bondholders will soon have an opportunity to acquire shares at an absolute maximum price of $3, and probably a bit less (we get a 5% discounted to the weighted average closing share price over July and August). So why would those shareholders want to pay over $3 now, when in a couple of months we coulld get those same shares cheaper? I imagine this has something to do with current TNR head share price behaviour!

SNOOPY

[Snoopy]

	Assets	Liabiliities	Shareholder Equity	Interest Expense	NPAT	ROE
Auctions & Fleet (FY2013)	$53.2m	$35.8m	$17.4m	$0m	$3.142m	18.0%
Auctions & Fleet (FY2016)	$99.8m	$65.6m	$34.2m	$3.23m	$4.44m	13.0%

On paper the ROE performance has deteriorated. However, 'Auctions & Fleet' have taken on a substantial interest bill since FY2013. Take that out and ROE has actually improved. Another way of thinking about this is to see that the new TNR management, by introducing debt to Finance & Auctions, has been able to pull capital out of that business and redeply it elsewhere within the Turners group. On an overall group basis, that 'Auctions & Fleet' capital is working much harder. Smart man, that Paul Byrnes!

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	$4.44m	13.0%
Finance, Insurance & Collection Services (FY2016)	$262.488m	$166.909m	$95.579m	$8.21m	$11.08m	11.6%
Divisional Total (FY2016)	$362.303m	$232.491m	$129.812m	$11.44m	$15.52m	12.0%

SNOOPY