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30-08-2018, 02:13 PM
#2751
Originally Posted by Snoopy
I make a point of not taking any Turners result at face value. It seems inevitable that once you delve into the results something comes out a bit smelly. And so it has proved with the FY2018 result. The key to 'cleaning out the garbage' is once again found under note 7 (the detail of the 'Profit Before Tax', and in particular the section marked 'Other Income'..
There you will find a very significant figure of $2.664m which is a 'Fair Value Gain on Contingent Consideration.'
Say what??? If there is a heading you can't understand, it often pays to look under the general heading of 'insurance' for further clarification. That took the nose of this hound to p76, and the heading 'Insurance Contracts' threw up the following detail.
Change in Discount rate 3.08% to 2.61% (Insurance Contracts) |
-$0.120m |
Difference between Actual and Assumed Experience(Insurance Contracts) |
$2.491m |
Difference between Actual and Assumed Experience (Life Investments) |
$2.491m |
Total |
$2.665m |
Within the bounds of the third decimal place rounding error, this is in agreement with the $2.664m which is a 'Fair Value Gain on Contingent Consideration.' I don't think this is a co-incidence. While this extra profit is real, I believe it is due to the ups and downs of markets and/or settlements of insurance contracts. These kinds of gains are not sustainable year to year. So the underlying profit for TRA was significantly less than the headline figure quoted. The same can be said for the money made on the 'revaluation gains on investments', 'revaluation gain on investment property' and the 'gain on sale of property plant and equipment'. In my judgement the actual comparable net profit gain, the figure that should be used when comparing results from year to year should be adjusted from the headline figure as follows:
Operating Net Profit = $23.192m - 0.72x$2.664m - ($0.590m+$0.820m+$1.000m) = $19.085m which is 18% lower than the headline figure.
With 84.802m shares on issue at balance date this equates to 'earnings per share' of 22.5cps
At today's trading price of $2.94, this puts TRA on an historical PE of 13.0
That looks 'about right' and shows that at under $3, TRA may not be quite the bargain that some think. Maybe Mr Market knows what he is doing after all?
The other element that must be factored into the 'profit growth' is the ever increasing number of shares on issue. I have added this information into the table below via an 'earnings per share' calculation..
|
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018 |
NPAT (Turners Limited) (A) |
$3.823m |
$8.595m |
$15.332m |
$16.789m |
$19.085m |
Shareholder Equity (Turners Auctions :TUA) |
$13.378mm |
|
|
Shareholder Equity (Dorchester Pacific: DPC) |
$74.052m |
|
|
|
Shareholder Equity (Turners Limited: TNR) |
|
$121.002m |
$129.812m |
$171.716m |
$214.323m |
Total Combined Shareholder Equity (B) |
$92.430m |
$121.002m |
$129.812m |
$171.716m |
$214.323m |
Shares on Issue EOFY |
NM |
63.077m |
63.431m |
74.524m |
84.802m |
eps |
NM |
13.6c |
24.2c |
21.8c |
22.5c |
Return On Equity (A)/(B) |
4.1% |
7.1% |
11.8% |
9.8% |
8.9% |
Note: I have also now normalized the tax treatment of the FY2015 result, as this gives a better basis for comparison.
It is interesting to see that while share price has gone nowhere over the last two years neither has Operating NPAT. And that correlation might not be a co-incidence!
SNOOPY
Well the two broker's analysts who cover TRA pointed this out in May.[One it greater detail than the other]
What they did not factor in their projections was future property development margins/revaluations,which I feel could be substantial.
I am expecting an excellent first half result, confirming TRA are on track to beat analysts' full year projections.This 1st half result will be announced late November.
Last edited by percy; 30-08-2018 at 02:26 PM.
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30-08-2018, 02:37 PM
#2752
Originally Posted by Beagle
I don't know how you get the time for all this but I for one am glad you do
I find 'skin in the game' a great motivating factor!
SNOOPY
discl: shareholder
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
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30-08-2018, 02:51 PM
#2753
Originally Posted by Beagle
Good you've got the time to get your snout deep in the accounts mate. I don't know how you get the time for all this but I for one am glad you do and I am also glad I have a very modest stake in these. Looks like as I suspected all along Colonial Motors is better value.
Just wait till Snoopy gets his muzzle into Colonial !
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30-08-2018, 03:00 PM
#2754
Originally Posted by percy
Well the two broker's analysts who cover TRA pointed this out in May.[One it greater detail than the other]
I am glad that I have finally caught up! Those other analysts must be real whiz kids though. I went back to the May release of results and noticed that the detail of note 7 (spelling out just what the other income was) was not given. That detail was not released until the annual report was published on 28th June. So I guess they must have had a crystal ball connected directly to Turners HQ!
What they did not factor in their projections was future property development margins/revaluations,which I feel could be substantial.
This is fair comment. I did not invest in Turners Automotive Group for their property development skills. But I am happy to benefit from them. I understand the model of:
1/ buying a site,
2/ developing it yourself (complete with removable improvements) and
3/ then on selling the developed property on a long lease, monetising your development gains up front.
I think it is brilliant, and I wonder, once Turners have finished redeveloping their own sites, whether they can take this model and redevelop sites for other businesses? If we regard property development as part of 'normal business' then my normalised operating profit estimate changes:
Operating Net Profit = $23.192m - 0.72x$2.664m - ($0.590m+$1.000m) = $19.683m
Personally I prefer to leave property development profits out. But I wouldn't call you wrong if you put them in!
Hey Percy once more thing. I remember you posting when you received the hard copy of the TRA annual report. Was it a properly bound copy? Or was it a colour photcopy with a staple in the corner like I got?
SNOOPY
Last edited by Snoopy; 30-08-2018 at 03:01 PM.
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
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30-08-2018, 03:08 PM
#2755
Bet it was the low rent one like you and I got Snoops. Doubt they bound Percy's one specially for him. I guess for a company that uses shipping containers as offices for their car yards we should be pleased it was in colour and they bothered to use a staple
Trouble is I have to much skin in different games and being a tri colored beagle its easy to get confused with where your true colours are
Ecclesiastes 11:2: “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”
Ben Graham - In the short run the market is a voting machine but in the long run the market is a weighing machine
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30-08-2018, 03:20 PM
#2756
An Intangible dilemma: 'BuyRight' or 'BuyWrong'
Originally Posted by Snoopy
Turners easily cover their 'current' liabilities from contracted liquidity that is coming due. That has to be very reassuring for shareholders and bondholders.
The 'problem', if you choose to see it as such, is the longer term resilience position as outlined in post 1481, titled 'Tier 1 and Tier 2 Lending Covenants FY2017'. What it comes down to is this.
If Turners management keep "doing what they say they will do" and keep delivering on results then there is no problem. But what happens if the car market slows?
Slower car sales mean less new finance contracts written and less new insurance business written. This would be a 'triple kick in the head' for Turners, and could result in goodwill write offs and an urgent capital injection need from shareholders. It wouldn't be a pretty picture and is the potential downside of the current growth strategy. I am not saying this scenario is likely. But I think investors should bear in mind that it is possible. The bare fact is the net tangible asset backing of TNR at balance date was:
($171.716 - $172.088) / 74.523m = -0.005c per share
The multi year asset value decline I have laid out in the table below
|
Shareholder Funds {A} |
Intangible Assets {B} |
No.Shares on Issue {C} |
NTA/share {{A}-{B}}/{C} |
EOFY2015 |
$121.002m |
$103.595m |
63.077m |
27.6c |
EOFY2016 |
$129.812m |
$118.106m |
63.432m |
18.4c |
EOFY2017 |
$171.716m |
$172.002m |
74.532m |
-0.4c |
You read that right. Turners have negative tangible assets, all signed off by the auditors. No-one will mention this if things continue to go well. But actually Turners is a highly leveraged house of cards. You might not want to be in there if the automotive market catches a cool breeze.
Despite what I wrote above, I am generally comfortable with a company having lots of intangible assets on the books provided:
1/ The assets were bought at the right price.
2/ The businesses that Turners acquired have continued to grow.
My one cause for concern is 'Buy Right Cars'. Turners management have acknowledged that it has not performed up to expectations and that the management has been replaced. There is over $10m in 'Buy Right' goodwill on the Turners books ($10.860m to be exact AR2018 p60). This is tested annually by the auditors, who check whether such value can be justified. So far all is hunky dory. But I did notice a divergence in the growth assumptions for this acquisition going forwards. See AR2018 p65. I tabulate these results against the equivalent assumptions from last year:
|
Year 1 Forecast Cashflows |
Year 2 Forecast Cashflows |
Year 3 Forecast Cashflows |
Year 3-4 Forecast Cashflows |
Year 4 to 5 Forecast Cashflows |
Terminal Cashflows |
FY2017 Perspective |
10% |
7.5% |
|
5.0% |
|
2.0% |
FY2018 Perspective |
|
60% |
8.0% |
|
5.0% |
2.0% |
The note starts "The year 1 forecast cashflows were extrapolated". I think 'year 1' means the 'current reporting financial year', but am not 100% sure. If I am right then from an FY2018 perspective 'Year 2' means FY2019 (the current financial year). This model is telling us that Turners are budgeting for an increase in cashflows from Buy Right cars of 60% this financial year. That is an enormous increase, even for a company with the growth ambitions of Turners. It is particularly shocking when you realise that only 12 months previously, Turners were looking for an increase of only 7.5% over the same time period. No doubt part of the reason the 'Buy Right' growth rate is forecast to be so high is because FY2018 so was disastrous. Turners are starting from an unexpectedly low base. But even so I think it is a big ask.
The question is, what happens to the 'Buy Right' goodwill if this 60% growth is not achieved? Possibly nothing. But it is also possible that Turners will be facing a multi-million dollar goodwill write down. If it happens it will be a 'non cash item'. But it was real cash, not that long ago! The company might require some recapitalisation if the write down happens. This is a real 'extra risk' for shareholders going forwards IMO.
SNOOPY
Last edited by Snoopy; 29-08-2019 at 10:06 PM.
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
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30-08-2018, 03:51 PM
#2757
The Buyright cars acquisition was a disaster.
The Buyright cars acquisition was fantastic, as it saved them years getting the larger foot print they needed in Auckland.
Take your pick which one you agree with,keeping in mind both are correct.
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30-08-2018, 03:57 PM
#2758
Originally Posted by Beagle
Bet it was the low rent one like you and I got Snoops. Doubt they bound Percy's one specially for him. I guess for a company that uses shipping containers as offices for their car yards we should be pleased it was in colour and they bothered to use a staple
Trouble is I have to much skin in different games and being a tri colored beagle its easy to get confused with where your true colours are
I received the cheap report.
Using containers as offices is a brilliant move.Fantastic signage area,and easily moved,giving TRA the agility to make use of great temporary prime sites.
OK the first will be in Wellington,however Beagle you will see them in The North Shore in the not to distant future.You will not miss them, as they will stand out like Beagles' b"lls,or should that be Couta1's b'lls.?...lol.
Last edited by percy; 30-08-2018 at 04:14 PM.
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30-08-2018, 04:32 PM
#2759
Originally Posted by percy
I received the cheap report.
Using containers as offices is a brilliant move.Fantastic signage area,and easily moved,giving TRA the agility to make use of great temporary prime sites.
OK the first will be in Wellington,however Beagle you will see them in The North Shore in the not to distant future.You will not miss them, as they will stand out like Beagles' b"lls,or should that be Couta1's b'lls.?...lol.
Must admit its amazing what can be done with shipping containers these days. Some people making interesting homes out of them !
https://www.buzzfeed.com/kristinchir...2X#.bfo0MOykZK
Last edited by Beagle; 30-08-2018 at 04:35 PM.
Ecclesiastes 11:2: “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”
Ben Graham - In the short run the market is a voting machine but in the long run the market is a weighing machine
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30-08-2018, 04:36 PM
#2760
Just remember Turners will be making big dollars using them,and re-using them,and re-using them .
Last edited by percy; 30-08-2018 at 04:37 PM.
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