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

[Snoopy]

Snoops — told you not to believe everything you find on the net, especially most things bags from investopedia.com

Simplest formula is ROIC = (EBIT x (1-Tax Rate)) / (Equity + Debt)

I could / should have been a bit more concise and instead of ’Debt’ said ‘Interest Bearing Debt (and/or Borrowings)”

Time for my own attempt to quantify 'Winner's Worry' over FY2018.

ROIC= ([$23.360m+$7.773m+$14.434m] x (1-0.28) ) / ($214.323m+ $317.373m) = 6.2%

All figures are taken from the Income Statement and Balance Sheet. How did I do?

SNOOPY

[winner69]

Time for my own attempt to quantify 'Winner's Worry'.

SNOOPY

The answer coming soon?

[Beagle]

Next weeks result will have to be a "real belter" to get your $3 mate. SP will most likely do nothing, (you read it from me first)
Motor vehicle companies can easily go down to a PE as low as 7 (and even 5 in a GFC) if the market thinks there's a recession coming. $2.00 on the cards if the market and economy get ugly in 2019.

[percy]

Is the full moon tonight or tomorrow night.?

[Beagle]

Not sure Percy but its pretty dark out there so probably time to lie down in my kennel. $2.00 sounds crazy eh... Not possible I hear you say...but its already fallen by $1.30 in the last 12 months so another 65 cents in the next 6 months isn't completely out of the question...just a logical extrapolation of the existing well established downtrend.

No worries though because the future prospects and metrics would be really compelling at $2 eh

[winner69]

Time for my own attempt to quantify 'Winner's Worry' over FY2018.

ROIC= ([$23.360m+$7.773m+$14.434m] x (1-0.28) ) / ($214.323m+ $317.373m) = 6.2%

All figures are taken from the Income Statement and Balance Sheet. How did I do?

SNOOPY

Good effort Snoops. ROIC is slightly higher if average capital over the year is used.

Next question - is this 6.2% return on invested capital more or less than Turner’s total cost of capital? - ie is Turners a value creator or not?

Give me your answer to that and I’ll try to explain the relevance to Turners Book Value (hopefully which will be more than $2.52 on Monday) and that while trading at that at the moment it still implies a fair degree of future improved financial performance.

[winner69]

Is the full moon tonight or tomorrow night.?

It’s today percy ....unfortunately

[percy]

It’s today percy ....unfortunately

Excessive barking from hounds made me think it may have been a day early.?.........................lol.

[winner69]

Excessive barking from hounds made me think it may have been a day early.?.........................lol.

......and more ominious is that metservice reports lot less cloud cover tonight so the moon will be shing bright

[Snoopy]

Good effort Snoops. ROIC is slightly higher if average capital over the year is used.

I understand the logic. The 'return' is earned over the whole year. So it makes sense to use the 'average invested capital' over the year, not the 'invested capital' on hand just at the end of the year. However there is always time taken to effectively deploy any new capital.

By using just the end of year capital, that means I will be underestimating ROIC (assuming the capital funding base was growing). If little new investment capital is introduced over FY2019, and if ROIC increases over FY2019, then this will show the new capital from the previous year is indeed being better deployed given time. And that is the kind of positive trend we shareholders want to be able to identify.

Next question - is this 6.2% return on invested capital more or less than Turner’s total cost of capital? - ie is Turners a value creator or not?

Given Turners told the Christchurch Roadshow that they can secure corporate funding at 4.5% to 5.5%, and they are earning 6.2% on their invested capital, then the answer must be 'yes.' It does make sense for them to borrow to invest. However I am aware that 'cost of capital' in accounting terms has a rather wider meaning than this. It incorporates the concept of 'Beta' which brings in 'equity price volatility'. Ironically if the TRA share price dived to $2.50 and then stayed there for two years, TRA's 'Cost of Capital' would decrease in accounting terms. However, I don't think there are many TRA shareholders today that are hoping for this to happen. Calculating a cost of capital based on past share price volatility seems a bit daft to me. So I prefer to set my own 'industry standard' capital cost based on how stable the earnings of a particular company might be in a future downturn. For Turners, I set this number at 7.5%. So by that measure, no Turners is not earning its cost of capital.

In this situation I think it is useful to take a wider industry viewpoint, and that is where 'The Investment Story' thread comes in. Go to post 6 in that thread and you will see that the 'net interest margin' for the Finance Division only compares very favourably with Heartland and Geneva. Also the net profit margin is only just below that of Geneva (post 22), while Geneva is in materially higher risk market. This leads me to believe that the underlying 'bones' of TRA Finance are very sound. When you take a bigger picture view, the Turners retail side of the business is not so capital efficient. But I feel that tying retail and finance together, under the TRA umbrella, should provide a kind of resilience that even Heartland does not have.

Turners have committed to not going back to shareholders for more cash. So I would argue that not making their 'cost of capital' in an accounting sense becomes less relevant if your expansion plans only involve bank borrowing. Clearly TRA is making a positive return on that.

Give me your answer to that and I’ll try to explain the relevance to Turners Book Value (hopefully which will be more than $2.52 on Monday) and that while trading at that at the moment it still implies a fair degree of future improved financial performance.

SNOOPY