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

[Lizard]

My thoughts are that at this point, they are probably worth about 85% of their net shareholders equity value ($27m). I say this on the basis that their asset base/product sales are not yet really of a scale to generate ongoing cashflow beyond expenses, so they are basically the sum of their financial resources with a discount for implementation risk. Works out at around 13cps.

Some more random comments:

• Where are the financial resources going to come from to increase lending? I am not clear on this point.
• If they are simply transferring cash from discontinued operations (RAM's, Senate) to lending, then how will they increase earnings sufficiently to achieve the 3 yr target of $4m profit?
• The size of funds under management (shown on their web-site) is tiny and difficult to see where they could offer an advantage at this point.
• Likewise, the life insurance business. In fact, all their businesses are currently so "niche" that it is difficult to see what they can do better than larger players.
• They have a three year horizon to repay the 5% notes ($17m), so would presumably need some other significant source of funds by then (e.g. bank facility). Although it's probably manageable, it is still a potentially costly hurdle to leap at some point.
• Although their half year result is ahead of budget, it was indicated at the agm that this was more due to lower costs than to higher sales.

Overall, I think they may well be a good investment at some point, but I am just going to leave on watch for now as think they could need another 2-3 years of consolidation and groundwork before they are ready for real growth. A break-even forecast for next year suggests there is probably a bit of time before they are going to look obviously "cheap".

[blackcap]

My thoughts are that at this point, they are probably worth about 85% of their net shareholders equity value ($27m). I say this on the basis that their asset base/product sales are not yet really of a scale to generate ongoing cashflow beyond expenses, so they are basically the sum of their financial resources with a discount for implementation risk. Works out at around 13cps.

Some more random comments:

• Where are the financial resources going to come from to increase lending? I am not clear on this point.
• If they are simply transferring cash from discontinued operations (RAM's, Senate) to lending, then how will they increase earnings sufficiently to achieve the 3 yr target of $4m profit?
• The size of funds under management (shown on their web-site) is tiny and difficult to see where they could offer an advantage at this point.
• Likewise, the life insurance business. In fact, all their businesses are currently so "niche" that it is difficult to see what they can do better than larger players.
• They have a three year horizon to repay the 5% notes ($17m), so would presumably need some other significant source of funds by then (e.g. bank facility). Although it's probably manageable, it is still a potentially costly hurdle to leap at some point.
• Although their half year result is ahead of budget, it was indicated at the agm that this was more due to lower costs than to higher sales.

Overall, I think they may well be a good investment at some point, but I am just going to leave on watch for now as think they could need another 2-3 years of consolidation and groundwork before they are ready for real growth. A break-even forecast for next year suggests there is probably a bit of time before they are going to look obviously "cheap".

Liz are they not going to pay back the bonds from the proceeds of the options... 150 million @ 10 cents or thereabouts is 15 million... (rough figures havent got them on hand) but that was my inital thought as to how they were planning to do it.

[blackcap]

Make that 12.5 cent options... that gets them very close if not over the 17 million needed to repay the notes.... and if profit is 4 million come 2012 then the shares should be trading over 12.5 cents. Not a bad strategy all up.

[Lizard]

Maybe you are right there blackcap... but what % of the options are with the former debenture holders (who also hold the notes?). I wouldn't think there would be a high exercise rate from them, and many would not hold a marketable parcel.

Also, conversion of the options is effectively built in future dilution on that basis, so would want to allow for that in valuation - i.e. limits upside to shares until exercised or expired.

[blackcap]

I am aware of the upside ceiling as it were... but with a $4 million dollar profit even double the number of shares on issue it should still provide for a shareprice in excess of 12.5 cents...and options are also saleable on market... yes they may have a small problem with the exercise thereof, but most option holders are shareholders and not debenture holders.... shareholders in the recent restructuring got options als the Business Bakery and Hugh Green.... I presume they would take them up.... $17 million in the bank.

[Lizard]

Hi blackcap,

I have just discovered the answers to my questions are all in the june prospectus with 5 year forward projections for balance sheet and cashflow we can compare against. Haven't seen a company brave enough to do that for a while - but will definitely be a good document to track performance against!

Looks like they are planning to get the majority growth through lending, funded by bank loans of $17m in 2012 and $10m in 2013, plus some growth in insurance income.

Biggest issue so far is that op cashflow is running well off the pace to make the 2011 target, so could throw a spanner in the works, but could be a simple timing issue at this stage.

On valuation side, presuming that they achieve all their 5 year projections exactly and make NPAT of $7.8m in year to Mar 2015, then assign market P/E of 10 and expect market cap at end of May 2015 to be $78m. Discount back at 25% pa for 4.5 yrs (based on that being the minimum I would want to bother investing in their shares for) and divide by the number of shares they predict at that time (253m), then would rate as buy up to 11.3cps at this point. Though if they can get through to 2015 and achieve all their targets, then perhaps a P/E of 14 will be fair by then (16cps equiv)?

[blackcap]

Hi Lizard,

Good investigating there. Your synopsis is pretty much spot on. Pe of 14 would be very fair if they meet targets. That said they are already running ahead of target according to their latest announcement which if anything is good for shareholders but also bond holders. Definately see a wealth transfer from Debenture holders to shareholders through the restructuring but then again it was probably a win win situation. A liquidation would mean less for both. A nice plan whoever ultimately came up with it for both sets of stakeholders. A NPAT of 7.8mill with 253 million shares on issue wouldnt that imply a shareprice of 40 cents with a PE of 14 rather than your figure of 16cents? Or have you discounted the 40 cents back into a PV?

[Lizard]

A NPAT of 7.8mill with 253 million shares on issue wouldnt that imply a shareprice of 40 cents with a PE of 14 rather than your figure of 16cents? Or have you discounted the 40 cents back into a PV?

Yes, as per above, have discounted over 4.5 years at 25%pa - which is the minimum I'd want to plan on getting back for something of this nature.

I think it is fairly early days as far as seeing how they are going against plan since plan was produced nearly half way through period when they had good visibility. The revenues are about on track for 50% of their 2011, but op cashflow is not - and they will be reliant on that cashflow for reinvestment if they are going to grow the loan book without resorting to other funding options (beyond the bank loans already allowed for). Link to companies office doc for the prospectus here if anyone wants to refer.

[Hoop]

Hi blackcap,

.........On valuation side, presuming that they achieve all their 5 year projections exactly and make NPAT of $7.8m in year to Mar 2015, then assign market P/E of 10 and expect market cap at end of May 2015 to be $78m. Discount back at 25% pa for 4.5 yrs (based on that being the minimum I would want to bother investing in their shares for) and divide by the number of shares they predict at that time (253m), then would rate as buy up to 11.3cps at this point. Though if they can get through to 2015 and achieve all their targets, then perhaps a P/E of 14 will be fair by then (16cps equiv)?

Hi Liz
Your sights may be too high with the P/E estimates ...historically DPC traded under 10 ....from memory about 8.
Most of the old NZ finance company sector shares use to trade with low P/E & low NTA/share ...the low P/E back in those days use to even out the low NTA /share in evaluating risk v reward investing. DPC was the oddball back then having a much higher NTA/share than its peers.

Edit; ...Its interesting to see these posts.....as I have too been recently eyeing DPC and saying Hmmmmm

[blackcap]

Liz and Hoop, cheers for succinct comments. I agree with Hoop that a lower PE of 10 is probably more realistic in the environment which they have traditionally traded. That said, this company still has the suprise element of the Business Bakery and what they want to achieve with it... That for me makes it an interesting prospect in these early day