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

[Snoopy]

Current year was:

$17.849m/ 74.524m = 24.0cps

That figure is based on the number of shares at the end of the financial year, whereas I suspect that 4-traders may be using a weighted average number of shares over the year. That would produce a higher 'eps' figure. Using my end of year share figures, I get a projected eps growth of between 16.7% and 28.8%. That is comparable to the 4-traders figures (actually a little higher). However, all of this 'growth' can be explained by the fact that Turners did not own either 'Buy Right' cars or 'Autosure' for the full year.

If we assume that Turners did own both 'Buy Right' cars and 'Autosure' for the full year, then FY2017 eps would have been.

$24.140m/ 74.524m = 32.3cps

Any rationalization of brands and back office facilities and more cross selling, plus a recovery of the insurance business should see an 'eps' even greater than this. However, I am assuming a continuation of the current buoyant market for second hand vehicles. A slowing of the housing market could affect eps negatively.

What are you expecting EPS to be for FY18?

Answered in my quoted post above.
Calculation of profit for "Buy Right' cars and 'Autosure' for the full year FY2017" is my projection for FY2018 (32.3cps). And that figure is higher than any of the analysts on 4-Traders pick.

Calculation of the incremental profit gain shown in my post 1479.

The real question though is what happens in FY2019? There is no doubt that Turners has performed well. But with everything delivering above expectations today, what will happen if the Automotive market slows to 'normal'? We shareholders get a triple hit of:

1/ lower auto sales and
2/ lower associated finance sales and
3/ lower insurance sales.

In those circumstances, how can a PE of 14 looking out into the FY2019 year be justified?

SNOOPY

[LAC]

But that is the risk in this type of business right. There might not be a slowdown and we will get another booming FY19 which we can then say the current PE is looking good. I still think looking at the future TRA is looking good for further EPS growth. Lets see what they say at the meeting in a few weeks time.
If they start to diversify outside of Automotive for the next few years, is there anything else that you would consider that would not justify a PE of 14?

[Snoopy]

But that is the risk in this type of business right? There might not be a slowdown and we will get another booming FY19 which we can then say the current PE is looking good.

The car market will go up and down. When it is up, I would expect a lower PE because of the expectation of a medium term slow down. When it is down I would expect a higher PE in anticipation of a medium term recovery.

I am aware that the market under the 'Turners' banner is now muddled as it contains more commercial vehicles. The commercial vehicle market and private vehicle market do not always operate in tandem. I am also aware that Turners operate in the used vehicle not the new vehicle market. 'Turners Auctions' in the old sense you might expect to lag the new vehicle market, because new vehicles are the upstream feeder of the second hand market. I am not quite sure how the 'Buy Right Cars' acquisition in particular or selling more second hand cars direct to the public in general affects this picture. I would guess that in a downturn, people who buy a new car might just hang onto it a bit longer rather than 'trade down' to a new 'second hand' vehicle.

The second hand vehicle fleet in NZ is old, but that is no guarantee that there will be pressure to lower that average vehicle fleet age. A fifteen year old Japanese car may have only done 150,00km. With careful servicing an owner might expect to eke out 300,00km from such a vehicle. Try that in your Ford Cortina or Morris Minor from a bygone era.

I still think looking at the future TRA is looking good for further EPS growth. Lets see what they say at the meeting in a few weeks time.

I agree. There is no need to panic.

If they start to diversify outside of Automotive for the next few years, is there anything else that you would consider that would not justify a PE of 14?

They are already diversified outside of Automobiles with the EC Credit Control collections business! Ok, I suppose they might give the job of chasing up recalcitrant car loan payers to EC Credit. But EC Credit, if anything should be negatively correlated to 'Automotive Retail' ( IOW when Automotive Retail and the associated finance does badly, then EC Credit should do well). I like business arms with a negative correlation to the primary business, because this should help smooth profits over market cycles.

I don't have a problem with Turners getting even deeper into Automotive Retail and all the associated finance and insurance though, as a matter of principle. But this brings in a greater cyclical business risk. And that should mean a more conservative balance sheet. I am not seeing much conservatism on the balance sheet of Turners at the moment.

SNOOPY

[Snoopy]

I don't have a problem with Turners getting even deeper into Automotive Retail and all the associated finance and insurance though, as a matter of principle. But this brings in a greater cyclical business risk. And that should mean a more conservative balance sheet. I am not seeing much conservatism on the balance sheet of Turners at the moment.

To expand on this, my standard debt measure is something called MDRT or 'Minimum Debt Repayment Time'. This is a figure in years which is the answer to the question:

"If all normalised profits for the year were channelled into repaying 'net company borrowing debt', how many years would that take?"

For FY2016 the answer was as follows:

MDRT Turners Limited FY2016

[(Parent Bank Borrowings) + (MTA Borrowings) + (TNRHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($109.327m+ $42.300m + $23.189m) - $13.810m] / [ $15.573n + 0.72($1.041m) ] = 9.8 years

At EOFY2017, this figure has somewhat blown out.

MDRT Turners Limited FY2017

[(Parent Bank Borrowings) + (MTA Borrowings) + (TNRHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($191.565m+ $49.021m + $25.561m) - $69.069m] / [ $16.261 ] = 12.1 years

I don't usually like putting 'fudge factors' into these calculations. But in this instance, with the purchase of 'Autosure' right at the end of the financial year, and no earnings contribution received, I will 'fiddle the result' so you can see what difference it makes.

If we look at 'annualised earnings', including a full year contribution from 'Buy Right cars' and 'Autosure' (my post 1479), then we can argue NPAT should be:

$16.261 + $1.03m +$5.44m = $22.731m

[($191.565m+ $49.021m + $25.561m) - $69.069m] / [ $22.731m ] = 8.7 years

So maybe the debt repayment picture isn't so bad? Even so, I wouldn't call 8.7 years a low figure. The TRA balance sheet is, IMO, being worked pretty hard.

SNOOPY

[Snoopy]

My voting form for directors piqued my interest in the composition of the TRA board. Three directors represent significant shareholdings.

Paul Byrnes: owns 4.44% of the company.
Grant Baker: represents 'Business bakery' that owns 16.34% of the company.
Alister Petrie: represents Bartel Holdings, owning 9.05% of the company.

Next we have

Matthew Harrison: former MD of EC Credit Control, now a Turners subsidiary.
John Roberts: former Veda Advantage (debt collector) senior executive.
Antony Vriens: former DPL Insurance executive, now a Turners subsidiary.

I don't question the competence of any of these board members. They all look like fine appointments considered on their own. But it does strike me as extraordinary that there are no independent directors with historic expertise in either the automotive retail industry or the finance industry. I don't begrudge significant shareholders a voice on the board to push their own barrow. But I do worry that there seems to be no-one independent on the board with automotive/finance experience to question whether that barrow is really being pushed in the right direction. It looks like a board of yes men to me. I hope I am wrong.

SNOOPY

[JeremyALD]

What's going on. 3.36 now.

[sb9]

What's going on. 3.36 now.

Back to 3.45 now....someone must've had their jitters about North Korea and tht the world was going to end today

[Beagle]

In those circumstances, how can a PE of 14 looking out into the FY2019 year be justified?

SNOOPY

Average EPS estimate off 4 traders for FY18 is 29.2 cps and for FY19 is 31.4 cps.
At $3.45 this morning that puts the stock on a prospective FY18 and FY19 PE of 11.8 and 11 respectively compared to a market average forward PE of close to 20.
I think much like HBL you have the wrong end of the stick with this one. Population growth will continue with immigration and when cars get to 15 years old they become like a nagging wife, there's usually one problem after another after another...people will keep changing cars, the world will keep turning and turners will probably continue to grow market share steadily.
The stock and the convertible bond look good value to me.
Disc: Convertible bond holder

[Snoopy]

Average EPS estimate off 4 traders for FY18 is 29.2 cps and for FY19 is 31.4 cps.
At $3.45 this morning that puts the stock on a prospective FY18 and FY19 PE of 11.8 and 11 respectively.

A PE 0f 11 to 11.8 still implies modest growth. But there isn't that much cash on the balance sheet to play with. And issuing new shares that are 'eps accretive' gets harder and harder the higher the current 'eps' goes. Modest organic growth of 5% or so could happen with high probability (say 70%). Then you might have hyper growth from a brilliant but as yet unannounced acquisition (chance say 10%). Or you could get a triple whammy automotive retail market slowdown due to falling property prices (chance say 20%).

I know that a beagle can only grab one end of the stick in his mouth at a time. But with a Y shaped branch there are three ends. Grabbing one end doesn't make the other two go away.

compared to a market average forward PE of close to 20.

Convincing yourself that buying a particular share is cheap because everything else is outrageously expensive doesn't wash with me. You can still overpay for a 'cheap' share.

I think much like HBL you have the wrong end of the stick with this one. Population growth will continue with immigration and when cars get to 15 years old they become like a nagging wife, there's usually one problem after another after another...people will keep changing cars, the world will keep turning and Turners will probably continue to grow market share steadily.
The stock and the convertible bond look good value to me.
Disc: Convertible bond holder

'probably continue to grow market share steadily.' A statement of faith in Turners management? I too am one of the Turners faithful, holding both the bonds and the shares. But just because I hold them doesn't prevent me seeing the other ends of the stick.

SNOOPY

[Beagle]

Well my misguided beagle friend its a simple case of you making things too complicated.
I am sure you will be familiar with this hounds modified Ben Garaham formula where I use a no growth PE of 10 for the current super low interest rate environment prevailing and then substitute 1G for Ben Graham's 2G, (because at my heart I hate paying too much for growth and love a bargain).
So how does G shape up ?
4traders lists the following result and expectations for the years ahead
2017 25.1c cps (actual)
2018 29.2 cps (forecast - forecast growth rate 16.3%)
2019 31.4 cps (forecast - forecast growth rate 7.5%)
2020 33.9 cps ( forecast - forecast growth rate 8%)

Average forecast growth rate 10.6%.
There is no two ended stick here my beagle friend, nor a Y shaped three ended stick just a juicy bone and seeing as you already own both the bonds and the shares its evident you already understand that its worth at least a PE of 11.8.

Actually using my own valuation formula it should be accorded a market average PE of 20. Management have to prove up these numbers and projected growth before I'd be looking to lock jaws on a bigger share of the bone but suffice to say I'm very comfortable with my significant sized but low risk stake with the convertible bonds.

You overthink things mate...just like you have with HBL which closed at an all time high today of $1.94.