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

[percy]

I wonder whether the staff at Autosure have watched: You Tube;Brazilian Toyota Commercial.??

[Snoopy]

hardt wrote: "In the last year or two their financial services and insurance division continues to become a bigger part of their business, capital intensive on both ends with little room for error."

Not sure that I agree with your above comment in the Turners situation hardt. Here is what Turners said after acquiring Autosure Insurance (p16 AR2017).

"The Autosure Insurance acquisition, including the Autosure brand, mechanical breakdown and payment protection insurance portfolios, was finalised as at 31st March 2017. This provides much needed scale for our insurance group , and focuses our underwriting effort on core products - MBI and Loan Repayment Insurance. We have a 10-year partnership with Vero for underwriting our comprehensive motor vehicle insurance policies."

Autosure was bought from Suncorp. But Vero, the underwriter of Turners Autosure is a subsidiary of Suncorp. So it looks to me as though most of the insurance risk has been outsourced to Suncorp, even though Turners has taken over the 'retail face' of the Autosure insurance business.

Following my attendance at the Christchurch roadshow presentation, I need to back-track on my post above. "Comprehensive motor insurance' has traditionally meant 'fire, theft and accident' cover, both for your vehicle and whatever vehicle(s) you might contact in a collision. However, given the breadth of motor vehicle insurance available today, there are plenty of things that 'comprehensive insurance' does not cover. An extended warranty/repair contract when buying a second hand vehicle is perhaps the most significant. It is into this policy gap that 'Autosure' was launched. The genesis was the Japanese car import business that started in the early 1980s without manufacturer blessing!

There was some discussion at the presentation about the cost of vehicle repairs. Since acquiring 'Autosure', Turners has found that the 'mechanical breakdown' policies on Japanese sourced vehicles were subsidizing the 'mechanical breakdown' policies on European sourced vehicles. Upon realizing this, Turners has directed Autosure to raise the premiums on European vehicles and reduce those on Japanese vehicles to better reflect the risk. A particular example given was of a Mercedes Benz wing mirror. One audience member guessed what he thought a fair price would be and doubled that figure for his 'price guess'. The true answer was three times his price guess IIRC! Anyway, it came out that Turners fully underwrites the Autosure costs themselves, which is contrary to what I suggested above. Nothing was mentioned about having a 'reinsurance' policy with a larger insurance industry player. So I assume that Turners do not do this, for Autosure. Todd told us that Turners spend $2m on mechanical repairs per month.

By contrast Turners do offer the traditional 'comprehensive insurance' for cars via Vero. On this type of policy, Turners earn a one off commission and do not have ongoing responsibility for costs of policy settlements. Turners are a 'retail face' for comprehensive insurance, but fully operate 'Autosure' and assume all risks for that in their own right. I hope that clears things up!

SNOOPY

[BlackPeter]

...
Since acquiring 'Autosure', Turners has found that the 'mechanical breakdown' policies on European sourced vehicles were subsidizing the 'mechanical breakdown' policies on Japanese sourced vehicles.
...
SNOOPY

Snoopy, good stuff, however the above statement should be the other way around ... Policies for Japanese cars (high margins due to low repair costs) are subsidizing policies for European cars (low or even negative margins due to high repair costs)

That's what they said anyway - and as holder of two European cars (I won't repeat this mistake ; can I confirm that they like to break and are bl**dy expensive to repair

[blackcap]

Snoopy, good stuff, however the above statement should be the other way around ... Policies for Japanese cars (high margins due to low repair costs) are subsidizing policies for European cars (low or even negative margins due to high repair costs)

That's what they said anyway - and as holder of two European cars (I won't repeat this mistake ; can I confirm that they like to break and are bl**dy expensive to repair

Had a BMW in NZ once... never again. Had one in Holland too.. not a problem. Funny thing was (tis about 10 years ago) but Toyota was the premium brand to be seen in, not BMW. ie there was more status in owning a Toyota than a BMW. Horses for courses, but have gone off European cars in the NZ context too.
Back to TRA, at least they have acknowledged the improper pricing in their insurance division and looked to rectify it.
Snoopy, are you less bearish on TRA now you have been to the presentation or are there still unanswered questions for you?

[percy]

Going by the way he was tucking into the tucka,I would think he is more fullish,rather than bullish or bearish..lol.

[Beagle]

Going by the way he was tucking into the tucka,I would think he is more fullish,rather than bullish or bearish..lol.

LOL that's a classic Beagle for ya...although this particular hound was far more interested in the financial feeds to come so barely nibbled at one scone at the Auckland meeting.


I used to parallel import parts from Singapore for my Mercedes when I had it. Local pricing for parts though official Mercedes-benz channels is highway robbery ! Autosure are dead right to riase premiums for high end Euro's...not only are the parts far more expensive but the cutting edge latest technology Euro's like the latest 7 series BMW are vastly more likely to require repairs due to their immensely complicated technology and systems. The current BMW 750 model (released in 2016) for example has been recalled 5 times for serious issues already. You can just imagine with a very high degree of probability that they will give a lifetime of trouble going forward.

[Jay]

Getting a bit off topic, but you don't seem to hear about these recalls for BMW for example, yet if it was a Toyota or Mazda for example you would.
As the saying goes try to build a car from buying spare parts and it will cost you x times more, you would expect it to cost more but 5 x + is a bit much

[kiwico]

Nothing was mentioned about having a 'reinsurance' policy with a larger insurance industry player. So I assume that Turners do not do this, for Autosure.
SNOOPY

In the insurance world you would normally buy reinsurance for a large single event of wide area damage, such as with the Canterbury earthquakes, or to insure low frequency but high severity risks. Being more of a maintenance type offering the Autosure cover would be covering low high frequency but low severity risks. With this type of cover premium increases can likely cover off what reinsurance would be used for in the regulated insurance world. Good to see they are reviewing where the claims are from and typical average cost, but if buyers of Japanese cars were happy with the original level of premium I'm surprised it was lowered.

[Snoopy]

Had a BMW in NZ once... never again. Had one in Holland too.. not a problem. Funny thing was (tis about 10 years ago) but Toyota was the premium brand to be seen in, not BMW. ie there was more status in owning a Toyota than a BMW. Horses for courses, but have gone off European cars in the NZ context too.

Before the early 1990s I am not sure Toyota had any serious manufacturing capability in Europe. And even now if you want to buy a Toyota out of the mainstream, I expect they are subject to restriction by quotas. As always, it is human nature to want what you can't readily get. So it is unsurprising that Toyota was considered a premium car back in the day when the Bimmer supply was far less limited.

Back to TRA, at least they have acknowledged the improper pricing in their insurance division and looked to rectify it.
Snoopy, are you less bearish on TRA now you have been to the presentation or are there still unanswered questions for you?

There are always unanswered questions. But I am surprised that you consider my latest valuation bearish! (excerpt below)

I believe that 'capitalising earnings' is a more realistic way to go.

The valuation is in two parts. Once again I am using an acceptable gross return of 7.5% for the dividend part of it.

Average dividend received over the last four years

(9c+12+13c+14.5c) / 4 = 48.5c, divide by four = 12.1c

Gross Capitalised Dividend Component = 12.1c / (0.075 x 0.72) = $2.24 (1)

Average Retained Earnings Valuation reinvested over the last four years

All things going to best plan, retained earnings should be worth more than cash paid as a dividend. But this assumes a largely monotonic increasing profit year in year out, with very few exceptions. I don't believe that the historical underlying profitability data indicates that Turners can achieve this. So I think it wise to assume that a 'dividend in the bank account' is worth more than a 'potential dividend in the bush'. To reflect 'business execution' and 'car market volatility' risks, I am going to increase my required return for 'retained earnings' by two percentage points, out to 9.5%

(10.4 + 12.2 + 9.5 + 11.1)/4 = 10.8c (average)

Gross Capitalised Retained Earnings Component = 10.8c / (0.095 x 0.72) = $1.58 (2)

So my total 'fair valuation' for TRA becomes (1) + (2):

$2.24 + $1.58 = $3.82

Thus at a market price of just over $3, it looks like TRA might be worth accumulating!

[blackcap]

Hi Snoops,

My apologies, by less bearish, I meant positive and yes I must have skipped over your latest $3.82 valuation which I did not see.

Glad you are on the accumulate side now

Personally I think there might be some more cheap shares for a while, plenty of those at $3.02 still looking for a stronger home but I do not mind, its a long term thing for me and if divs keep going up with EPS, well the SP cannot stay at $3 forever.