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  1. #1541
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    Default The Interest Revenue Dilemma

    I have been looking some more into the 'interest income' received by Turners, because I want to re-evaluate my interest margin calculations for the Turners Finance division.

    The following information is from the 'Segmental Information' in the respective annual reports.

    Divisional Interest Revenue 2017 2016 2015 (from AR2016) 2015 (from AR2015)
    Automotive Retail $7.590m $7.261m $2.781m $0.101m
    Finance $22.907m $21.182m $16.661m $19.341m
    Collection Services NZ $0.013m $0.006m $0.006m $0.006m
    Collection Services Aus $0.0m $0.0m $0.0m $0.0m
    Insurance $0.875m $0.822m $0.718m $0.718m
    Corporate & Other $0.418m $0.448m $0.883m $0.883m

    Readers can see that the FY2015 results were re-stated. Suddenly a lot more interest revenue was apportioned to the Automotive Retail division. This equivalent figure grew significantly in FY2016 and FY2017 as well. It is difficult to calculate a representative 'interest margin' when the 'interest revenue' figure gets moved around like this. Anyone have a view as to why management have pushed so much of their interest income across into the Automotive division?

    SNOOPY
    Last edited by Snoopy; 30-08-2017 at 01:59 PM.
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  2. #1542
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    Default Interest Revenue dilemma resolved?

    Quote Originally Posted by Snoopy View Post
    I have been looking some more into the 'interest income' received by Turners, because I want to re-evaluate my interest margin calculations for the Turners Finance division.

    The following information is from the 'Segmental Information' in the respective annual reports.

    Divisional Interest Revenue 2017 2016 2015 (from AR2016) 2015 (from AR2015)
    Automotive Retail $7.590m $7.261m $2.781m $0.101m
    Finance $22.907m $21.182m $16.661m $19.341m
    Collection Services NZ $0.013m $0.006m $0.006m $0.006m
    Collection Services Aus $0.0m $0.0m $0.0m $0.0m
    Insurance $0.875m $0.822m $0.718m $0.718m
    Corporate & Other $0.418m $0.448m $0.883m $0.883m

    Readers can see that the FY2015 results were re-stated. Suddenly a lot more interest revenue was apportioned to the Automotive Retail division. This equivalent figure grew significantly in FY2016 and FY2017. It is difficult to calculate a representative 'interest margin' when the income figure gets moved around like this. Anyone have a view as to why management have pushed so much of their interest income into the Automotive division?
    I have done a bit more sleuthing. If I look on p46 of AR2015, the following segment descriptions appear:

    1/ Automotive Retailing (formerly Auctions & Fleet): Purchasing motor vehicles and commercial goods for resale. Remarketing motor vehicles, trucks, heavy machinery and commercial goods.

    2/ Finance: Provides asset based secured finance to consumers and SMEs.

    Contrast these to the equivalent segment descriptions found in AR2016 p40:

    1/ Automotive Retailing (formerly Auctions & Fleet): remarketing (motor vehicles, trucks, heavy machinery and commercial goods) and purchasing goods for sale (motor vehicles and commercial goods) and related asset based finance to consumers.

    2/ Finance: Provides asset based secured finance to consumers and SMEs.

    The big change here is that 'asset based finance' can now be put into the 'automotive retailing' box or the 'finance' box. There appears to be no distinction, unless there is significance to that word 'secured'. If the word 'secured' is significant, then the Automotive Retailing arm could finance cars without any security, which seems unlikely. At the very least, if you were loaning funds on a car, you would expect to secure that loan against the residual asset value of the purchased car.

    On p30 in AR2016 there is some useful information on defining 'interest income'.

    "The effective interest method calculates the amortised cost of a financial asset or financial liability and allocates the interest income or interest expense over the relevant period. The calculation includes all fees paid or received and directly related transaction costs that are an integral part of the effective interest rate. The interest income or expense is allocated over the life of the instrument and is measured for inclusion in profit or loss by applying the effective interest rate to the instruments amortised cost."

    It could be that Turners retrospectively decided that the Finance division should pay a 'loan finders fee' to the Automotive Retailing division for FY2015. Whatever fee was retrospectively allocated looking back on FY2015, looks to have gone up substantially (from 14% of the loan revenue in FY2015 to 26% of loan revenue for FY2016) in subsequent years. It could be that if the typical loan term was four years, then the Automotive Retailing segment pinched the equivalent of all the interest income for the first year. If that is the explanation, I think this severely distorts the groups declared finance earnings. To get a true 'finance' picture, it looks like I will have to add the 'Automotive interest revenue' to the 'Finance' interest revenue'.

    None of this makes any difference to the overall TRA result, because the exercise I have described is just taking profits out of one segment and giving it to another. But when you are looking at how profitable the finance segment is, it is very disappointing to see such a large chunk of interest revenue shuffled off to another division. It means you can no longer take the finance division revenues at face value.

    SNOOPY
    Last edited by Snoopy; 30-08-2018 at 06:26 PM.
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  3. #1543
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    Default The EBITDA Score card

    Quote Originally Posted by Snoopy View Post
    I seem to have done quite a bit of waffling on this thread over the last few days. So time to nail down some targets for future reference.

    Required increase in EBITDA, as dictated by the banking syndicate supporting TNR, is 87.5% over two years. If we express the annual growth rate required as 'g', then:

    g^2= 1.87 => g=1.37

    So an annual EBITDA growth rate of 37.5% is required. This equates to $49.7m for FY2016 and $68.1m for FY2017. Expect the TNR share price to be punished if these growth expectations are not met!

    Principal assumptions are as follows:

    1/ Current EBITDA earnings are just holding at a level the banks are happy with, but on the cusp of breaching bank covenants.
    2/ The one off increase in TUA shares that TNR booked to profit in FY2015 of $7.058m is part of 'normal' profit for bank covenant purposes (increases in asset values on the balance sheet are real gains,no matter the source). If this one off profit figure is taken out, then the EBITDA increase from FY2015 to FY2016 is 71%
    3/ The earnings performance of TUA during the period 01-01-2014 to 31-12-2014 was in line with management forecasts made in August 2014.
    4/ Any new acquisitions must earn a profit 37.5% higher than overall group EBITDA margin from the previous year.

    Paul Byrnes has a great management team together. But this required 37.5% annual growth rate will test even the best management teams. Are they up to the challenge? If not there should be plenty of opportunity to buy more DPC shares at around 25c from a future capital raising, that would be required to 'fix the books'.
    I posted the above two years ago.

    What actually happened:

    FY2016: EBITDA = EBT + I + DA = $21.551m + $11.436m + $2.144m = $35.131m

    FY2017: EBITDA = $24.631m + $11.350m + $2.863m = $38.844m

    SNOOPY
    Last edited by Snoopy; 31-08-2017 at 09:11 AM.
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  4. #1544
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    Default

    Hmm...beginning get bit itchy on this one, looks like downward trend is in tact slowly and steadily...

  5. #1545
    percy
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    Default

    The agm is not far away.It is on the 20th September.
    I am expecting a further very positive outlook update.
    Then we will have a better idea whether they will be looking for eps growth of more or less than the 25% I am looking for.
    Last edited by percy; 31-08-2017 at 09:19 AM. Reason: added word growth

  6. #1546
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    Default

    Quote Originally Posted by percy View Post
    The agm is not far away.It is on the 20th September.
    I am expecting a further very positive outlook update.
    Then we will have a better idea whether they will be looking for eps of more or less than the 25% I am looking for.
    Thanks percy, that's the target date I've in mind too for any further decision on my holding...

  7. #1547
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    Default 'Turners Finance' Net Interest margin: FY2017 perspective

    Quote Originally Posted by Snoopy View Post

    It could be that Turners retrospectively decided that the Finance division should pay a 'loan finders fee' to the Automotive Retailing division for FY2015. Whatever fee was retrospectively allocated looking back on FY2015, looks to have gone up substantially (from 14% of the loan revenue in FY2015 to 26% of loan revenue for FY2016) in subsequent years. It could be that if the typical loan term was four years, then the Automotive Retailing segment pinched the equivalent of all the interest income for the first year. If that is the explanation, I think this severely distorts the groups declared finance earnings. To get a true 'finance' picture, it looks like I will have to add the 'Automotive interest revenue' to the 'Finance' interest revenue'.

    None of this makes any difference to the overall TRA result, because the exercise I have described is just taking profits out of one segment and giving it to another. But when you are looking at how profitable the finance segment is, it is very disappointing to see such a large chunk of interest revenue shuffled off to another division. It means you can no longer take the finance division revenues at face value.
    I have been doing some number crunching to try and see what the 'net interest margin' would be if Turners treated their finance company segment profits like other finance companies. In this instance the finance segment does not include the insurance or EC Credit businesses.

    I have taken out what I see as 'cross subsidy' to the Automotive Retailing segment, and put that back into the finance segment where I think it belongs. It is not unusual for a finance company to pay a commission to acquire new business. IIRC Heartland had an agreement like this with PGG Wrightson, when Heartland bought out the 'PGG Wrightson Finance' unit. I would be happy to see the Automotive Retailing segment be paid an internal 'loan finders fee'. But a 26% odd 'loan finders fee' over the life of a finance loan seems very high to me. I would go so far as to say it is 'misleadingly distortionary'. This is why I am taking the 'interest revenue' out of the Automotive Retail business segment, and putting it back into the finance segment.

    Interest Revenue (Finance Declared) {A} Interest Revenue (Auto Retail Declared) {B} Interest Revenue (Corporate Overhead Adjustment) {C} Total Interest Revenue {A}+{B}+{C} ({F}) Total Interest Expense {H} Receivables SOFY {D} Receivables EOFY {E} Receivables (averaged) {{D}+{E}}/2 ({G}) Net Interest Margin ({F}-{H})/{G}
    FY2015 $19.512m $2.781m $1.985m $24.278m 0.4895 x $7.381m $37.726m + $49.953m (*1) $142.827m $129.040m 16.0%
    FY2016 $24.417m $7.261m $0.115m $31.793m 0.5123 x $11.436m $142.827m $167.598m $155.213m 16.7%
    FY2017 $26.818m $7.590m $0.063m $34.471m 0.4122 x $11.350m $167.598m $207.143m $187.371m 15.9%

    (*1) For FY2015 I have added on the financial receivables of Oxford Finance acquired on 1st April 2014 (the first day of FY2015).

    There are those on this forum who salivate on how the likes of how the finance company 'Heartland Bank' can operate on a net interest margin of 4.5%. But my calculations indicate 'Turners Finance' operates on an underlying net interest margin of over three times that figure.

    SNOOPY
    Last edited by Snoopy; 03-09-2017 at 03:01 PM.
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  8. #1548
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    Default Segment Net Profit Picture: FY2017 Perspective

    Quote Originally Posted by Snoopy View Post
    I would be happy to see the Automotive Retailing segment be paid an internal 'loan finders fee'. But a 26% odd 'loan finders fee' over the life of a finance loan seems very high to me. I would go so far as to say it is 'misleadingly distortionary'. This is why I am taking the 'interest revenue' out of the Automotive Retail business segment, and putting it back into the finance segment.
    A company that operates across disparate divisions can sometimes be better understood by seeing what happens when those divisions are separated out into virtual stand alone companies.

    FY2017 (as presented) Automotive Retail Collections NZ Collections Aus Finance Insurance Corporate & Other Total As Declared (Check)
    EBT (as reported) $15.397m $6.006m $0.239m $10.156m $0.928m ($8.095m) $24.631m
    EBT (corp costs apportioned) $9.266m $5.590m ($0.071m) $9.306m $0.540m $24.631m
    Tax @ 28% ($2.595m) ($1.565)m $0m ($2.606m) ($0.151m) ($6.917m) ($7.057m)
    NPAT $6.671m $4.025m ($0.071m) $6.700m $0.389m $17.714m $17.609m

    Note: Corporate costs have been apportioned according to divisional revenues.

    That looks quite nicely balanced, particularly when you consider the new 'Autosure' acquisition will substantially boost insurance earnings in the coming year. But as an exercise, let's make the segment change to the finance market business, by transferring the interest revenue from Automotive Retail back to finance. This is representative of what Turners themselves did as recently as FY2015.

    FY2017 (Snoopy adjusted) Automotive Retail Collections NZ Collections Aus Finance Insurance Corporate & Other Total As Declared (Check)
    EBT (as reported) $15.397m $6.006m $0.239m $10.156m $0.918m ($8.095m) $24.631m
    EBT (interest revenue adjusted) $11.936m $6.006m $0.239m $13.617m $0.928m ($8.095m) $24.631m
    EBT (corp costs apportioned) $6.046m $5.590m ($0.071m) $12.527m $0.540m $24.631m
    Tax @ 28% ($1.693m) ($1.565)m $0m ($3.508m) ($0.151m) ($6.917m) ($7.057m)
    NPAT $4.358m $4.025m ($0.071m) $9.019m $0.389m $17.769m $17.609m

    Suddenly the picture looks less balanced, with finance making up over 50% of the group's profits. It also highlights the contribution of the NZ Debt collection business, which in reality contributes almost as much to the bottom line as the much higher profile 'Automotive Retail' segment. Once corporate overheads are tacked onto the Australian debt collection unit we can see it is not profitable, an observation I find surprising. I do hope that Turners management know what they are doing over there.

    I wonder how vulnerable the business is to the Auckland property slowdown? Will the Auckland car market, that Turners have so heavily leveraged themselves into with the 'Buy Right' cars acquisition hold up? Remember that profits can fall in Automotive retail by $1.026m and yet still remain flat on the books, because 'Buy Right' cars was not owned by Turners for all of FY2017.

    SNOOPY
    Last edited by Snoopy; 31-08-2017 at 02:15 PM.
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  9. #1549
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    Default Profit/Revenue from 'Automotive Retail' to 'Finance': Example Calculation

    Quote Originally Posted by Snoopy View Post
    But as an exercise, let's make the segment change to the finance market business, by transferring the interest revenue from Automotive Retail back to finance. This is representative of what Turners themselves did as recently as FY2015.
    Just in case I suddenly disappear under a bus and my posts become incomprehensible, this is the record of how I have handled this 'tricky situation.' It involves looking at the earnings and revenue from 'Automotive Retail', as declared in the FY2015 and FY2016 (referencing FY2015) annual reports for the same 'Automotive Retail' division.

    Automotive Retail FY2015 from AR2016 {A} from AR2015 {B} Difference {A}-{B}
    EBT FY2015 $3.145m $1.877m $1.268m
    Interest Revenue from Automotive Retail FY2015 $2.781m $0.101m $2.680m

    => ratio of incremental EBT to incremental 'Interest Revenue' = $1.268m / $2.680m = 0.4731

    OR

    => ratio of incremental 'Net Profit' to incremental 'Interest Revenue' = (0.72 x $1.268m) / $2.680m = 0.3406

    I then use this same ratio to extract a profit from the extra revenue in subsequent years. If you think that sounds like a dubious extrapolation to make for those subsequent years, then you are probably right. However, with no disclosure of the actual profit from financing put into automotive retail in FY2016 and FY2017, this is the 'best guess' effort that I can calculate.

    SNOOPY

    P.S. Sometimes an analyst can be carried away with the numbers, chanting the mantra that more complicated is always better. In this instance I have to ask the question, what is the meaning of the $101k of 'base interest revenue' assigned to the Automotive Retail division in FY2015? I don't believe it has any particular importance or significance, and it may very well change from year to year in a way that is not predictable. I therefore intend to ignore this figure as a separate entity and 'roll it up' into the one interest revenue total of $2.781m.

    => ratio of incremental EBT to incremental 'Interest Revenue' = $1.268m / $2.781m = 0.4560

    I have used this ratio to make an estimate of the incremental EBT generated by these Interest Revenue cashflows in subsequent years:

    FY2016: 0.4560 x $7.261m = $3.311m
    FY2017: 0.4560 x $7.590m = $3.461m

    I have added the incremental EBT earnings and revenues to the 'finance segment' and removed them from the 'automotive retail segment'. That creates a zero sum result on the overall revenues and earnings.
    Last edited by Snoopy; 02-09-2017 at 03:54 PM. Reason: added postscript
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  10. #1550
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    Snoopy,

    What are you expecting EPS to be for FY18?

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