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

[percy]

Used car sales usually follow new car sales,so the article in The Herald is of interest to us.
Headed "NZ new vehicle sales rise 3 per cent in August,heading for annual record".
MIA ceo David Crawford commented;"We have strong net immigration,competitve new vehicle prices,low cost finance and the NZ dollar is relatively strong,we expect these conditions remaining for a while."
TRA shareholders are "well positioned."

[Snoopy]

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 Graham 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%.

Those forecast growth rates are cumulative.

So after three years you can expect a cumulative growth rate of:

1.163 x 1.075 x 1.08 = 1.35

The average growth rate for this period, let's call it 'g' satisfies the equation:

g x g x g =1.35 <=> g^3=1.35 <=> g=1.35^(1/3) => g =10.5%

The Ben Graham formula for stock valuation as originally advocated in 'Security Analysis' was:

V = eps x (8.5+2g) = 25.1 x (8.5 + 0.21) = $2.19

So I take it the 'Beagle' modified version is

V = eps x (10+g) = 25.1 x (10 + 0.105) = $2.54

Still somewhat short of where the share price is today. What am I missing?

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 I have never bought 'Turners Automotive Group' shares or bonds. I acquired both of them through the TUA takeover. In the process an extremely conservatively financed car auction and retail business has transformed into the highly leveraged finance group you see today. Some people who came on to the share register by the same route I did may feel comforted by the latest name change to 'Turners Automotive Group', thinking the company has gone back to its roots. But they'd be wrong.

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...

In the name of Ben Graham going from a PE of 8.5 to 10 and now 20? You are now valuing the share TRA by self created PE inflation?

SNOOPY

[Beagle]

g in those formula's Snoopy is expressed as a whole number not a decimal point. i.e. 10.5
To be fair Ben Graham asked what is the sustainable 7-10 year growth rate when estimating g. This is almost impossible to predict with stocks other than those that have very long track records of steady growth like RYM.
See below.

[Beagle]

Those forecast growth rates are cumulative.

So after three years you can expect a cumulative growth rate of:

1.163 x 1.075 x 1.08 = 1.35

The average growth rate for this period, let's call it 'g' satisfies the equation:

g x g x g =1.35 <=> g^3=1.35 <=> g=1.35^(1/3) => g =10.5%

The Ben Graham formula for stock valuation as originally advocated in 'Security Analysis' was:

V = eps x (8.5+2g) = 25.1 x (8.5 + 21) = $7.40

So I take it the 'Beagle' modified version is

V = eps x (10+g) = 25.1 x (10 + 10.5) = $5.15

Still somewhat short of where the share price is today. What am I missing?



Actually I have never bought 'Turners Automotive Group' shares or bonds. I acquired both of them through the TUA takeover. In the process an extremely conservatively financed car auction and retail business has transformed into the highly leveraged finance group you see today. Some people who came on to the share register by the same route I did may feel comforted by the latest name change to 'Turners Automotive Group', thinking the company has gone back to its roots. But they'd be wrong.



In the name of Ben Graham going from a PE of 8.5 to 10 and now 20? You are now valuing the share TRA by self created PE inflation?

SNOOPY

Amended theoretical valuations, corrected as above assuming they can maintain 10.5% growth over the long run which is not necessarily a safe assumption.
I do feel however that the current PE is inconsistent with their growth rate but the market sees this differently so it would appear I am missing something.....
Not adding to this one until they can prove their eps growth.

[Snoopy]

g=10.5%

The Ben Graham formula for stock valuation as originally advocated in 'Security Analysis' was:

V = eps x (8.5+2g) = 25.1 x (8.5 + 0.21) = $2.19

So I take it the 'Beagle' modified version is

V = eps x (10+g) = 25.1 x (10 + 0.105) = $2.54

Still somewhat short of where the share price is today. What am I missing?

g in those formula's Snoopy is expressed as a whole number not a decimal point. i.e. 10.5

Happy to rerun the numbers on that basis:

g=10.5%

The Ben Graham formula for stock valuation as originally advocated in 'Security Analysis' was:

V = eps x (8.5+2g) = 25.1 x (8.5 + 2x10.5) = $7.40

So I take it the 'Beagle' modified version is

V = eps x (10+g) = 25.1 x (10 + 10.5) = $5.15

I guess such valuations might be possible with a 10.5% growth rate sustained for 7-10 years. But it would be a brave person to predict that kind of growth going forwards. I would call those valuations brain flushes from a super optimist.

SNOOPY

[winner69]

A PE of 20 for TRA is ridiculous


Methinks 12/13 is about fair, maybe that is even a bit high

[Beagle]

To be clear - I think you'd be a brave man to predict 10%+ growth over the next 7-10 years for any company on the NZX with SUM exceptions.
Fact - SP has been in steady decline in recent months as has the bond price.
The market is telling us the vehicle industry has peaked and we're headed down. I hope this isn't right as I have HBL and CMO shares both of which are also heavily dependent on a healthy vehicle market. Won't surprise me if the word "flat" or steady is used at some stage soon by Turners.

[percy]

A PE of 20 for TRA is ridiculous


Methinks 12/13 is about fair, maybe that is even a bit high

I rate TRA higher than the following,and they are my second largest holding after HBL..
AWF pe 18.07....EBO pe 19.88.....FRE pe 19.69....MFT pe 24.21.
Therefore yes a PE of 20 is possible,and may be is not rediculous after all,and they deserve to trade on a PE of twice MPG's pe 10.52....lol...

[percy]

Used car sales usually follow new car sales,so the article in The Herald is of interest to us.
Headed "NZ new vehicle sales rise 3 per cent in August,heading for annual record".
MIA ceo David Crawford commented;"We have strong net immigration,competitve new vehicle prices,low cost finance and the NZ dollar is relatively strong,we expect these conditions remaining for a while."
TRA shareholders are "well positioned."

I think David Crawford's comments are worth a second read.

[Snoopy]

I do feel however that the current PE is inconsistent with their growth rate but the market sees this differently so it would appear I am missing something.....
Not adding to this one until they can prove their eps growth.

Mr B, I draw your attention to note 20 in AR2017. There you will find assumptions used to test the value of the goodwill on the books, and the modelled future growth rates. The goodwill on the books from the old 'Turners Auctions','Buy Right Cars' and the 'Autosure' acquisition are all based on the following growth rates:

Growth Forecasts	Year2	Year3	Year 4-5	Terminal Rate
Turners Group, Buy Right Cars, Autosure	10%	7.5%	5%	2%

If we take the 29.2c forecast for FY2018 and consider that represents a growth rate of 16% over the 25.1c from FY2017, then we can work out a ten year growth picture.

1.16 x 1.1 x 1.075 x 1.05 x 1.05 x 1.02 x 1.02 x 1.02 x1.02 x1.02 = 1.67

The geometric average annual growth rate to achieve that 67% of growth over ten years is:

g^10 = 1.67 <=> g = 1.67^(1/10) = 5.26%

Using the Ben Graham formula for stock valuation as originally advocated in 'Security Analysis':

V = eps x (8.5+2g) = 25.1 x (8.5 + 2x5.26) = $4.77

Using the 'Beagle' modified version we get

V = eps x (10+g) = 25.1 x (10 + 5.26) = $3.83

$3.83 based on forecast earnings of 29.2c gives a forward PE of: 383/29.2 = 13

That is pretty close to the sort of PE figure that Winner was bandying about. Perhaps the thing that the other beagle was 'missing' was nothing more than a more conservative growth rate?

SNOOPY