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

[Snoopy]

Divisional Liability Allocation FY2017
	Liabilities		Elimination Liabilities Reallocated		Corporate Liabilities Reallocated
Automotive Retail	$103.82m	26.89%	$103.49m	33.82%	$130.18m
Finance	$203.17m	52.61%	$202.52m	66.18%	$254.74m
Corporate & Other	$79.17m	20.50%	$78.91m
Sub Total	$386.16m
Eliminations	-$1.24m
Total	$384.92m	100.00%	$384.92m	100.00%	$384.92m

Note that the 'finance' header in this instance also incorporates the insurance and debt collection divisions.

Divisional Liability Allocation FY2017
	Liabilities		Elimination Liabilities Reallocated		Corporate Liabilities Reallocated
Automotive Retail	$115.07m	23.97%	$104.85m	29.46%	$128.86m
Finance	$275.52m	62.99%	$251.06m	70.54%	$308.55m
Corporate & Other	$89.44m	18.63%	$81.50m
Sub Total	$480.04m
Eliminations	-$42.63m
Total	$437.41m	100.00%	$437.41m	100.00%	$437.41m

Note that the 'finance' header in this instance also incorporates the insurance and debt collection divisions. This is a 'building block' post used to derive divisional shareholder equity.

SNOOPY

[Snoopy]

Divisional EBIT Allocation FY2017
	EBT	Revenue	EBT Corporate Reallocated (A)	Interest Expense	Liabilities	Corporate Interest Expense Reallocated (B)	EBIT: (A)+(B)
Automotive Retail	$11.936m	72.77%	$6.046m	$3.052m	33.82%	$3.838m	$9.884m
Finance	$20.790m	27.23%	$18.585m	$5.972m	66.18%	$7.512m	$26.097m
Corporate & Other	-$8.095m			$2.327m
Sub Total	$24.631m
Eliminations	$0m
Total	$24.631m	100.00%	$24.631m	$11.350m	100.00%	$11.350m	$35.981m

Divisional EBIT Allocation FY2018
	EBT	Revenue	EBT Corporate Reallocated (A)	Interest Expense	Liabilities	Corporate Interest Expense Reallocated (B)	EBIT: (A)+(B)
Automotive Retail	$12.304m	64.67%	$6.514m	$3.428m	29.46%	$4.226m	$10.740m
Finance	$27.781m	35.33%	$24.619m	$8.232m	70.54%	$10.118m	$34.737m
Corporate & Other	-$8.952m			$2.673m
Sub Total	$31.133m
Eliminations	$0m
Total	$31.133m	100.00%	$31.133m	$14.344m	100.00%	$14.344m	$45.477m

Notes:

1/ Turners use thew term 'Operating Earnings' to mean EBT. To calculate divisional EBIT, we have to allocate the interest expense between divisions. This I have done in proportion to divisional liabilities.

2/ EBT figures from the 'segmented results' in the annual report do not correspond to the EBT figures in this table. This is because I have takn my esitmate of 'finance EBT' earned in the Automotive Division and added those to the Finance Division. Turners themselves have said they will we doing this from FY2019. By doing this in advance of what Turners themselves will do, it will make for more appropriate comparatives in the future.

3/ A substantial amount of the improvement in Finance EBT year on year is because of the 'Autosure' insurance acquisition.

SNOOPY

[Snoopy]

TRA for FY2017
	Assets	Liabiliities	Shareholder Equity	Interest Expense	NPAT	ROE
Automotive Retail (FY2017)	$164.16m	$130.18m	$33.98m	$3.84m	$4.353m	12.8%
Finance, Insurance & Collection Services (FY2017)	$392.47m	$254.74m	$137.73m	$7.51m	$13.382m	9.72%
Divisional Total (FY2017)	$556.63m	$384.92m	$171.71m	$11.35m	$17.73m	10.3%

Care needs to be taken when interpreting these figures, taken from the Annual Report of FY2017. The assets and liabilities are end of year figures. So they aren't necessarily representative of the assets and liabilities that were on the books through the year because two major acquisitions:

1/ 'Buy Right Cars' (29th July 2016), now part of 'Automotive Retail'
2/ 'Autosure' (31st March 2017), which I have grouped into 'Finance' above.

With 'Autosure' in particular, this came onto the Turners books on 31st March 2017. Yet no earnings for this business contributed to the 'Finance Division' result because 31st March 2017 was also the balance date. Thus the apparent sharp deterioration in 'Finance ROE' for the year is not what it seems.

The 'assets' sand 'liabilities' in this post have been taken from posts 2791 and 2792 respectively.
The interest expense figurs have been taken from post 2793
The NPAT figures have been calculated by multiplying the EBT 'Corporate Reallocated' figure from post 2793 by 0.72 (representing a tax rate of 28%).

TRA for FY2018
	Assets	Liabiliities	Shareholder Equity	Interest Expense	NPAT	ROE
Automotive Retail (FY2017)	$176.57m	$128.86m	$47.71m	$4.226m	$4.690m	9.83%
Finance, Insurance & Collection Services (FY2018)	$475.16m	$308.55m	$166.61m	$10.118m	$17.726m	10.6%
Divisional Total (FY2018)	$651.73m	$437.41m	$214.32m	$14.344m	$22.416m	10.5%

Note that the expected earnings and ROE improvements expected from incorporating the earnings contributions of 'Autosure' for the first time has occurred.

SNOOPY

[Snoopy]

In recognition of TNR being a hybrid company, I am now performing the EBIT to Interest expense test on the finance section of TNR only (my post 1477).

Updating for the FY2017 financial year (ended 31-03-2017)

The underlying interest expense is shown under note 7 (AR2017) to be $11.350m. Of this ( $11.350m x 0.6618= ) $7.511m can be applied to the finance division.

The underlying EBT for the finance division may be found in the same post.

(EBT +Interest Expense)/(Interest Expense) = [$18.585m+$7.511m]/$7.511m = 3.47 > 1.2

=> Pass Test

It is now time to give the Turners Finance division the same scrutiny it would have if it was a bank. Turners Finance isn't a bank, so there is no real world consequence for failing any of these tests. Nevertheless I think they are worth doing to see how 'Turners Finance' stacks up to some of the separately operating finance companies that do have to withstand the scrutiny of such tests.

In recognition of TRA being a hybrid company, I am performing the EBIT to Interest expense test on the finance section of TRA only (my post 2793).

Updating for the FY2018 financial year (ended 31-03-2018)

The underlying interest expense is shown under note 7 (AR2018) to be $14.344m. Of this ( $14.344m x 0.7054= ) $8.232m can be applied to the finance division.

The underlying EBT for the finance division may be found in the same post.

(EBT +Interest Expense)/(Interest Expense) = [$24.619m+$8.232m]/$8.232m = 3.99 > 1.2 (the test standard)

=> Pass Test

SNOOPY

[Snoopy]

To ensure liquidity over the next twelve months, management has the ability to move resources between divisions. So despite this measure being of primary interest in sizing up financial companies, I believe it is more correct to study the TNR group as a whole. The current account information that I seek is in the FY2017 annual report, but it is scattered. Let's see what happens when I bring it all together again.

Financial Assets	0-12 months	Reference
Cash & Cash Equivalents	$69.069m	AR2017 p38
Financial Receivables Contractural Maturity	$99.349m	AR2017 p62
Reverse Annuity Mortgages	$1.892m	AR2017 p65 Note 16
Total Current Resources	$170.310m	(addition)
Financial Liabilities	0-12 months	Reference
Current Liabilities	$18.750m+$50.998m	AR2017 p51
Total Current Liabilities	$69.748m	(addition)

What we have here is an on paper 'theoretical' current shortfall of:

$69.748m - $170.310m = -$100.562m

A 'negative shortfall' is in fact a surplus, and that is superficially a very healthy position to be in with this test's twelve month (current) time horizon.
I say 'theoretical' because I have based this forecasted cashflow deficit on contracted maturity of financial receivables and historically negotiated repayment of bank borrowings. In fact many of these 'contracted receivables' can be rolled over, if a new car is bought on finance to replace the old one (for example). It is also true that the planned repayment of bank borrowings can be renegotiated and retimed. This means that the actual cash surplus will very likely be greater than the $100.562m that I have predicted.


The test I am asking TNR to meet is a follows: Over the twelve months from balance date:-

[(Contracted Cash Inflow) + (Other cash Available)] > 1.1 x (Contracted Cash Outflow)

=> ($170.310m + $'X'm) > 1.1 x $69.178m
=> $170.310m > $76.096m (this is true)

The theoretical extra cash available " $ 'X'm from a net sell down of car inventory and retaining more earnings rather than paying dividends I haven't even bothered to calculate this year. The contracted cash position is so strong that it would be a waste of time showing that even more cash could be raised.

This is a huge turnaround from FY2016, and a very strong 'pass'

To ensure liquidity over the next twelve months, management has the ability to move resources between divisions. So despite this measure being of primary interest in sizing up financial companies, I believe it is more correct to study the TNR group as a whole. The current account information that I seek is in the FY2018 annual report, but it is scattered. Let's see what happens when I bring it all together again.

Financial Assets	0-12 months	Reference
Cash & Cash Equivalents	$25.415m	AR2018 p30
Financial Receivables Contractural Maturity	$144.001m	AR2018 p56
Reverse Annuity Mortgages	$0m	AR2018 p58 Note 16
Total Current Resources	$169.416m	(addition)
Financial Liabilities	0-12 months	Reference
Current Liabilities	$88.066m+$30.690m	AR2018 p44
Total Current Liabilities	$110.756m	(addition)

What we have here is an on paper 'theoretical' current shortfall of:

$110.756m - $169.416m = -$58.660m

A 'negative shortfall' is in fact a surplus, and that is superficially a very healthy position to be in with this test's twelve month (current) time horizon.
I say 'theoretical' because I have based this forecasted cashflow deficit on contracted maturity of financial receivables and historically negotiated repayment of bank borrowings. In fact many of these 'contracted receivables' can be rolled over, if a new car is bought on finance to replace the old one (for example). It is also true that the planned repayment of bank borrowings can be renegotiated and retimed. This means that the actual cash surplus will very likely be greater than the $58.660m that I have predicted.


The test I am asking TNR to meet is a follows: Over the twelve months from balance date:-

[(Contracted Cash Inflow) + (Other cash Available)] > 1.1 x (Contracted Cash Outflow)

=> ($169.416m + $'X'm) > 1.1 x $110.756m
=> $169.416m > $121.832m (this is true)

The theoretical extra cash available " $ 'X'm from a net sell down of car inventory (say) and retaining more earnings rather than paying dividends I haven't even bothered to calculate this year. The contracted cash position is so strong that it would be a waste of time showing that even more cash could be raised.

This 12 month outlook for the net maturity of cash, while not quite as strong as FY2016, is nevertheless still strong.

Turners earn a strong 'pass' on this test. Or as dear old Colin would have said "solid as", except this time he would be right!

SNOOPY

[Snoopy]

I am continuing my analysis this year so that the financial statistics that I am evaluating are applied only to the financial division of the company.

I am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found in the 'Consolidated Statement of Financial Position' (AR2017, p38), and my post 1470 on asset allocation.

Tier 1 capital > 20% of the loan book.

(Turners Group (Finance Division) has only Tier 1 capital for these calculation purposes.)

Tier 1 Capital = (Shareholder Equity) - (Intangibles: less Turners Auctions Intangibles)
= (0.7051x$171.716m) - ($172.088m -$45.600 -$22.859)
= $17.448m

The money to be eventually repaid to the company (assets of the company) can be found as assets on the balance sheet. This is the sum total of:

1/ 'Financial Assets at fair value through profit or loss': $10.320m
2/ 'Finance Receivables': $207.143m
3/ 'Receivables and deferred expenses': 0.7051 x $8.489m
4/ 'Reverse annuity mortgages': $9.222m

For the FY17 year these come to $232.678m

$17.448m > 0.2 x $232.678m = $46.536m (false)

=> Fail Test

I am continuing my analysis this year so that the financial statistics that I am evaluating are applied only to the financial division of the company.

I am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found in the 'Consolidated Statement of Financial Position' (AR2018, p30), and my post 2794 on asset allocation.

Tier 1 capital > 20% of the loan book.

(Turners Group (Finance Division) has only Tier 1 capital for these calculation purposes.)

Tier 1 Capital = (Shareholder Equity) - (Intangibles: less Turners Auctions and Buy Right Cars Intangibles{*))
= (0.7291x$214.323m) - ($170.982m -$45.600 -$22.859 -$10.860m)
= $64.600m

(*) Note these intangibles belong to the 'Automotive Retail' Division

The money to be eventually repaid to the company (assets of the company) can be found as assets on the balance sheet. This is the sum total of:

1/ 'Financial Assets at fair value through profit or loss':	$53.378m
2/ 'Finance Receivables':	$289.799m
3/ 'Other Receivables and deferred expenses':	0.7291 x $11.747m
4/ 'Reverse annuity mortgages':	$9.997m
For the FY2018 year these come to	$361.739m

$64.600m > 0.2 x $361.739m = $72.348m (false)

=> Fail Test

One intangible included in this list is $11.752m relating to the Acquisition of 'Autosure'. Because this is so recent and it is contributing to Turners result to expectations, I believe this goodwill could easily be converted back to cash should Autosure be on sold. If this were done, Turners would pass this test. This means that subject to Autosure continuing to perform in the future for Turners, I don't think we shareholders should be that concerned about this test failure. Nevertheless I would describe Turners Automotive Group as 'adequately capitalised' rather than 'well capitalised' as a result of this test.

SNOOPY

[Snoopy]

Turners is free to negotiate with its parent bankers on what is a suitable level of funding for the company. It seems inconceivable that they would negotiate their own loan package in a way that would put their own 'funding core' at risk. So we can use the information we have combined with a 'rule of thumb' to calculate an appropriate sized funding core.

The table below has taken items from the balance sheet (marked (1)). I have written the table with all the pieces adding up to a whole. However, the table has largely been constructed in a reverse way. That means starting with 'the whole' then figuring out a way to allocate 'the whole' to the separate constituent pieces.

	Assets		Liabilities		Shareholder Equity
Finance (Not Underlying)	$185.326m (3)	-	$166.793m (4)	=	$18.533m (6)
Underlying Finance	$207.143m (1)	-	$87.948m (5)	=	$119.195m (6)
Finance Sub Total	$392.469m (*)	-	$254.741m (*)	=	$137.728m (2)
Automotive Retail	$164.164m (*)	-	$130.176m (*)	=	$33.988m (2)
Balance Sheet Total (All)	$556.633m (1)	-	$384.917m (1)	=	$171.716m (1)

(*) These items are from my off-line 'segmented' spreadsheet. Assets/Liabilities are sized in proportion to segmented balance sheet information, but with eliminations and corporate costs apportioned between the 'automotive retail' and 'all other finance' divisions.

Calculation (3) allows us to work out the core assets not related the underlying finance contracts of the business (everything else apart from the receivables book) by simple subtraction. The finance company 'rule of thumb' for their core is to ensure that:

(Non-Risk Liabilities)/(Non-Risk Assets) < 0.9

From this, we can work out that the Non-Risk Liabilities must be no more than:

(Non-Risk Assets) x 0.9 = $185.326m x 0.9 = $166.793m (which is answer 4 above).

Simple subtraction and addition is then used to work out the rest of the numbers in the table.

So what's the point of this so far?

By working out the minimum size of the business core (as measured by assets and liabilities), that means we can measure how well the rest of the business is set up to do the customer lending, the bit that actually generates the profits for the Turners Finance division. This is done by looking at the assets and liabilities left outside the core.

Implied Available Financing Gearing ratio
= (At Risk Liabilities)/(At Risk Assets)
= $87.948m/$207.143m
= 42.5%

Generally you would want to match your 'At Risk Liabilities' with your 'At Risk Assets'. This particular match looks acceptably conservative. But how does it compare with other listed finance entities? Rather better than the 64.3% that I have calculated for 'Geneva Finance' for FY2017 as it turns out. In practical terms, one might take this to mean that Turners has the capacity to expand their finance business loan book at a greater rate than Geneva, without issuing new capital. Not saying I wouldn't buy Geneva. But on this measure TNR looks better, which might be one reason why it trades on a higher PE than Geneva.

The underlying gearing ratio of a lending company is much more obvious when that company takes in deposits as well. In the case of TRA all of the 'deposit' funding is provided by their banking arrangements. Turners is free to negotiate with its parent bankers on what is a suitable level of funding for the core of the company. It seems inconceivable that they would negotiate their own loan package in a way that would put their own 'funding core' at risk. So we can use the information we have combined with a 'rule of thumb' to calculate an appropriate sized funding core.

The table below has taken items from the balance sheet (marked (1)). I have written the table with all the pieces adding up to a whole. However, the table has largely been constructed in a reverse way. That means starting with 'the whole' then figuring out a way to allocate 'the whole' to the separate constituent pieces. I start with filling in the number (1)s, then use arithmetic to calculate number (2)s. I keep on 'counting' the remaining numbers so that the table is filled in, in numerical order.

	Assets		Liabilities		Shareholder Equity
Finance (Not Underlying)	$185.368m (3)	-	$166.831m (4)	=	$18.537m (6)
Underlying Finance	$289.799m (1)	-	$141.715m (5)	=	$148.804m (6)
Finance Sub Total	$475.167m (*)	-	$308.546m (*)	=	$166.621m (2)
Automotive Retail	$176.565m (*)	-	$128.863m (*)	=	$47.702m (2)
Balance Sheet Total (All)	$651.732m (1)	-	$437.409m (1)	=	$214.323m (1)

(*) These items are from my off-line 'segmented' spreadsheet. Assets/Liabilities are sized in proportion to segmented balance sheet information, but with eliminations and corporate costs apportioned between the 'automotive retail' and 'all other finance' divisions.

Calculation (3) allows us to work out the core assets not related the underlying finance contracts of the business (everything else apart from the receivables book) by simple subtraction. The finance company 'rule of thumb' for their core is to ensure that:

(Non-Risk Liabilities)/(Non-Risk Assets) < 0.9

From this, we can work out that the Non-Risk Liabilities must be no more than:

(Non-Risk Assets) x 0.9 = $185.368m x 0.9 = $166.831m (which is answer 4 above).

Simple subtraction and addition is then used to work out the rest of the numbers in the table.

So what's the point of this so far?

By working out the minimum size of the business core (as measured by assets and liabilities), that means we can measure how well the rest of the business is set up to do the customer lending, the bit that actually generates the profits for the Turners Finance division. This is done by looking at the assets and liabilities left outside the core.

Implied Available Financing Gearing ratio
= (At Risk Liabilities)/(At Risk Assets)
= $141.715m/$289.799m
= 48.9%

Generally you would want to match your 'At Risk Liabilities' with your 'At Risk Assets'. The 'at Risk Assets' is another way of saying the 'finance receivables loan book'. The less borrowings you have to support the loan book, the more resilient your operation will be in a downturn. But there is another way to look at this. The less borrowings you have, the more restricted the size of the financial receivables loan book - you are not working the borrowing capacity to maximise the size of your loan book and hence maximise your returns. The greater the utilisation of your 'borrowing capacity' the greater the potential return, but also the greater the potential risk in a downturn. The fact that the at risk liabilities have increased as a percentage of the at risk assets over the year suggests to me that the Turners lending policy has become more conservative compared to FY2017.

SNOOPY

[blackcap]

Those director fees increases a bit hard to take if you ask me..

see notice of meeting. I can understand some of the justification like extra director but in some cases they want to double the amount.
I will probably vote AGAINST this resolution.

[winner69]

Those director fees increases a bit hard to take if you ask me..

see notice of meeting. I can understand some of the justification like extra director but in some cases they want to double the amount.
I will probably vote AGAINST this resolution.

Read this and they probably deserve even more than requested

Greedy bastards in the pigs trough (I can use that phrase because they are all boys)

https://www.turnersautogroup.co.nz/s...e%20Review.pdf

[percy]

Those director fees increases a bit hard to take if you ask me..

see notice of meeting. I can understand some of the justification like extra director but in some cases they want to double the amount.
I will probably vote AGAINST this resolution.

I have never seen a review that has not recommended increases."He who pays the piper calls the tune."
As the directors have a great deal of skin in the game I think they are double dipping,which should not be encouraged.
Wonder what they have against the DPL Insurance Chair ?