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

[biker]

With current businesses doing well, organic growth, possible M&A and excellent management, I think DPC is looking increasingly good value at 24c but the market may take a while yet to recognise it.

[blackcap]

Yip - I am pretty happy with that.

Ditto, been acquiring for a while now (I was a seller a year plus ago above the 30 cent mark) and really think that management are doing the right thing. Forward looking PE is acceptable but I like the potential for more Merger and Acquisition activity as Byrnes et al have shown in the last 2-3 years that they are very selective at what they purchase and seem to buy low PE assets that exhibit organic growth or assets that supplement their own operations (eg, Turners). 24 cents could be looking cheap in a year or 2.

[Snoopy]

'EBIT' not listed in the DPC FY2013 annual report so I have had to derive it from other numbers. That means adjusting the NPAT for tax refunds before finallly adding back the interest expense.

($-0.133m + $2.355m)/$2.355m = 0.9453 < 1.2

=> DPC fails the EBIT to Interest Expense Ratio test.

Updating the performance metrics for the financial year just gone. I am interested in the underlying performance of the finance business at DPC. So I am leaving out the equity accounted earnings of Turner's Auctions in which DPC has a significant stake.

In addition, I leave out the effect of the substantial tax losses brought back onto the books which benefitted DPC shareholders during the year. While the benefit of bringing these losses back onto the books is very real for DPC shareholders, they are not useful when assessing the performance of the underlying business going forwards.

DPC paid no income tax for FY2014. So EBIT can best be estimated by adding to operating profit (huh, I thought EBIT was operating profit - obviously not so in the case of DPC) the interest expense:

($4.171m + $2188m)/$2.188m = 2.91 > 1.2

=> a big improvement from last year. DPC now passes the EBIT to Interest Expense Ratio test.

SNOOPY

[Snoopy]

The gearing ratio in based on the underlying debt of the company, stripping out the loans made to others on the balance sheet.

$70.765m -( $7.834m + $16.370m + $4.681m ) = $41.880m

Likewise on the asset side of the balance sheet we have to strip the finance receivables from the other (underlying) company assets. From the Balance Sheet.

$103.955m - $28.757m = $75.198m

Gearing Ratio = Underlying Liabilities/Underlying Assets = $41.880m/$75.198m = 55.7% < 90%

=> Pass Test

Updating the above FY2013 figures

The gearing ratio in based on the underlying debt of the company, calculated by stripping out the already contracted future liabilities eventually payable to insurance policy holders on the balance sheet.

$52.630m -( $6.733m + $15.293m + $6.420m ) = $24.184m

Likewise on the asset side of the balance sheet we have to strip the finance receivables, and this case the equity investment in TUA, from the total company assets. From the Balance Sheet.

$126.682m - $37.726m - $10.209m = $78.747m

Gearing Ratio = Underlying Liabilities/Underlying Assets = $24.184m/$78.747m = 30.7% < 90%

=> Pass Test, and a large improvement on the previous year

SNOOPY

[Snoopy]

1) The loans you are concerned with are Assets of the company (money due to be repaid to the company) and not Liabilities. These are usually risk weighted but in the absence of the weightings to be applied use 100% to be safe (HNZ weighs in near 100%, ANZ is I think nearer 70%) and it comes in around $71m

2) Tier 1 Capital for Dorchester is definitely no more than $3.62m ($33.2m less intangibles less deferred tax).

$3.62m /$71m gives just over 5% which is a fail in anybodies book.

Best Wishes
Paper Tiger

I made a hash of this last year, but PT put me straight. So let's see if I can get it right this year.

I do realise that Tier 1 and Tier 2 capital are usually terms reserved for banks, and that DPC is not a bank. But to enable a comparison with other listed entities in the finance sector, please bear with me.

We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and disclosed reserves defined as:

Tier 1 capital > 20% of the loan book.

(Dorchester has only Tier 1 capital for these calculation purposes.)

Tier 1 Capital = (Shareholder Equity) - (Intangibles) - (Deferred tax)
= $74.052m - $25.912m - $6.761m
= $41.379m

Not sure if I should make another deduction for 'Investment in Associate' (the Turners shareholding) but my gut feeling is no, so I won't.

The money to be 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'
2/ 'Finance Receivables'
3/ 'Receivables and deferred expenses'
4/ 'Reverse annuity mortgages'

For the FY14 year these come to $77.65m

$41.379m / $77.65m = 53.3% > 20%

This is a big improvement on the fail grade of last year, and shows the result of the recapitalisation of the company during the year.

SNOOPY

[Snoopy]

We are looking here for a 'liquidity buffer' (including undrawn bank lines) of 10% of the loan book. My interpretation of this hurdle is that it requires us to look at how current liabilities are matched to current assets over a 12 month time horizon. It is akin to a 12 month cashflow 'stress test'.

Looking at note 25b in the annual report on liquidity risk, I see that Financial Assets that are held for availability over the next 12 months total:

$16.979m + $5.774m = $22.753m

Financial liabilities due for payment add up to:

$18.443m + $2.345m = $20.788m

That is a deficit of some $2m. Note 23 has detailed information on the bank facilities, but curiously no information on borrowing limits. Perhaps a longer term holder can advise me what is going on there?

It is rather curious that despite DPC releasing a rather full set of their accounts to the NZX, these accounts do not contain any explanatory notes. Why would DPC have done that? It looks like I will have to wait until the actual full year report is published before I can assess 'current asset' 'current liability' liquidity issues.

SNOOPY

[Snoopy]

Likewise on the asset side of the balance sheet we have to strip the finance receivables, and this case the equity investment in TUA, from the total company assets. From the Balance Sheet.

$126.682m - $37.726m - $10.209m = $78.747m

'Finance receivables' are the outstanding loan book, and are not assets than can be readily 'called in' by the company. To do so would unravel the very nature of the business as a going concern, and practically may not be possible in a reasonable time frame. I am making the same call on the TUA shares that DPC holds. An alternative view is that these shares are readily convertible to cash as they can be sold at any time on the sharemarket. I disagree with this because:

1/ Liquidity of TUA is poor and you cannot easily dump a substantial stake.
2/ In time the intention is to increase DPC motor vehicle lending, and financially you could argue that the motor vehicle loan book of TUA will become an integral part of the DPC business that cannot easily be unpicked.

Not sure I am right on those two points though. In this instance, if I am wrong, it means the DPC equity position is even stronger than I have already calculated.

SNOOPY

[Snoopy]

Maybe(like me), they think TUA can double their NPAT by FY16

I note the smiley Noodles. But how about some actual "dividends to be received calculations" on how DPC will fare as a result of their TUA shareholding?

I wrote this in my post 908.
"Don't forget though that if the TUA share price rises by 90c to $2.72 from the $1.82 acquisition price paid by DPC, this still only raises the net asset backing of DPC by a single cent. A legacy of the huge number of DPC shares now on issue!"

But what about future dividends consolidated from TUA?

Over FY2013 the TUA dividend payout was 16cps. Let's say that doubles to 32cps by FY2016. It isn't too difficult, using the same proportionality formula as above, to see that the net annual dividend received by DPC will be a modest one third of a cent per DPC share should that happen, up from one sixth of a cent per DPC share today. The dividend income growth would be the difference between those two figures, and is also just one sixth of a cent per DPC share. Put another way that represents an increase of under 1% when looked at as part of DPC's total (potential) dividend yield to their own shareholders.

In summary then, TUA will affect DPC going forwards.
But if DPC double their own profit by FY2016, then the TUA dividend cashflow contribution to that doubling - even if TUA has a stellar performance (doubling profit themselves) - will only be a small effect (0.1666/2.04 = 8% of any mooted doubling of DPC profit from FY2014).

SNOOPY

[Snoopy]

Dorchesters projected margin for the year ended March 2014 is 14.9% (best interpretation). If we take a rather optimistic projection and say the $10.5m that Dorchester predicts for FY2015 is on the same amount of revenue as FY2014, then the projected operating margin for Dorchester for FY2015 becomes:

$10.5m / ($67.4- $27.2)m = 26.1%

The operating margin figure for FY2014 can now be calculated:

$4.171m / $31.327m = 13.3%

From the previous 30th April 2014 press release:

-----

Dorchester CEO, Paul Byrnes, said the profit from the three trading operations is expected to come in at around $6.5 million.

“Additionally, there will be two extraordinary items that will have the net effect of increasing the net profit after tax to around $8 million."

-----

The headline profit came in above guidance at $8.210m. But the operating profit was only $4.892m, a substantial fall on the $6.5m projected weeks earlier. Did DPC substantially underperform, then write back some more tax benefits than planned to mask this fact?

Not according to the 30th April 2014 press release.

-----

The second item results from bringing approximately $11 million of tax losses on to the balance sheet, resulting in a positive impact on profit of around $3.1 million.

------

Actual taxation benefits brought on board were $3.225m, which is close enough to the $3.1m projected.

Also brought on board in the previous half year was the bringing forward of interest payments due on capital notes converted early to shares. This is listed as a $1.669m loss and comes in as part of the operating loss. I think this is misleading as this payment is not part of normal operations. The operating profit is more correctly:

$4.892m + $1.669m = $6.561m

Interesting that that figure does line up with the 30th April 2014 forecast!

So the 'real' margin ( NPAT/revenue )for FY2014 was:

$6.561m / $31.327m = 20.9%

That figure is boosted by DPC paying no income tax because of previous losses. But it is still a good figure.

SNOOPY

[Snoopy]

Also brought on board in the previous half year was the bringing forward of interest payments due on capital notes converted early to shares. This is listed as a $1.669m loss and comes in as part of the operating loss. I think this is misleading as this payment is not part of normal operations. The operating profit is more correctly:

$4.892m + $1.669m = $6.561m

Interesting that that figure does line up with the 30th April 2014 forecast!

So the 'real' margin ( NPAT/revenue ) for FY2014 was:

$6.561m / $31.327m = 20.9%

That figure is boosted by DPC paying no income tax because of previous losses. But it is still a good figure.

FY2014 is done and dusted so time to look forwards. The biggest change has been the acquisition of Oxford Finance, settled on 1st April 2014 the first day of the new financial year.

From the 17th March 2014 press release:

-----

Value of the (Oxford) loan book now over $50 million. Oxford Finance loans are originated through a mix of channels, including motor vehicle dealers, finance brokers, strategic partnerships with a number of smaller finance companies and direct lending. Over 75% of loans are motor vehicle financing. The business has a strong presence in the Wellington, Wairarapa, Taranaki, Hawkes Bay, Waikato and Bay of Plenty areas.

The acquisition will boost the value of our total loan book to close to $90 million and there remains good growth potential for both Dorchester Finance and Oxford Finance. Oxford Finance is well established with a diversified and loyal customer base, an experienced management team and a strong operational platform. We will continue to operate the business under the Oxford brand.

We expect Oxford Finance to contribute $3 million of earnings before interest and tax in the first year to 31 March 2015. Additional synergies will arise for Dorchester in areas such as insurance, IT and compliance costs although we have not factored these in to our acquisition pricing or forecast returns.

The final purchase price will be between $11.3 million and $12.3 million depending on earnings of the business for the 12 months to 31 March 2015. The consideration for the acquisition will be paid in cash which will be funded from retained earnings and the proceeds of last year’s capital raising.

------

The Oxford acquisition more than doubles the size of the new combined Dorchester/Oxford loan book. Finance receivables go from $37.725m to near $90m. But how will this acquisition affect the margin going forwards?

Without information on the state of the Oxford books pre acquisition it is difficult to know.

SNOOPY