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

[percy]

There are 2 announcements for the Business Bakery.

SPH Notice - The Business Bakery L.P.
https://www.nzx.com/announcements/319102

SPH Notice - Baker Investment Trust No 2
https://www.nzx.com/announcements/319105

First one says: Details of the transactions or other events requiring disclosure: In specie transfer of 8,461,723 shares held in TRA by The Business Bakery L.P. to its limited partners

Second one says: In specie distribution of shares in TRA held by The Business Bakery LP to its limited partners, including 2,464,124 shares to the trustees of the Baker Investment Trust No 2

Doesn't look like they're selling their shares on market, but rather transferring of shares around. Who are these limited partners I wonder?

The Business Bakery [GP]Limited was 40% owned by Grant Baker,40% Geoff Ross and 20% Stephen Sinclair.
The Business Bakery [GP] Limited controlled The Business Bakery LP.I do not know the make up of partners or their holdings.
What we can see is the in specie distribution of TRA shares means Grant Baker held 35.28%% of the LP.,and existing shareholder Harrison had only a modest holding in the LP.

[peat]

The NZX 50 is up 3.05% so far this week, with one day to go. If it holds onto those gains this will be the best week since July 2016.

It looks to me as if the market has broken out of a lengthy consolidation phase lasting best part of 2 years.

[BlackPeter]

yeah just saw that lol, so they just transferred half to a different trust?

Not sure the numbers completely add up, but yes - it looks like the Baker family restructured their investment trusts without changing their interest in TRA. Non event for holders.

[Snoopy]

Interest is paid over a year and liabilities go up and down over that same period. The net interest paid, once the year has wrapped up, is a fixed amount. The 'average' amount of the loan on which that interest is paid is more nebulous. A crude way to estimate the average is to:

1/ Take the loan balance at the end of the financial year.
2/ Take the loan balance at the end of the previous financial year.
3/ Work out the average of 1/ and 2/

Take the known interest expense, divide that by the average loan balance (3 above) and you can calculate an implied interest rate paid over the financial year. This is what I have done to compile the table below. For the years 2014 and before, all figures come from the relevant year Dorchester report. For the years 2015 and beyond, the figures come from the 'Turners Limited' [TNR] (from FY2017 onwards renamed 'Turners Automotive Group' [TRA]) annual reports:

	FY2011	FY2012	FY2013	FY2014	FY2015	FY2016
Interest Expense (A)		$3.064m	$2.928m	$3.857m	$7.381m	$11.436m
Total Liabilities	$48.634m	$49.932m	$70.765m	$52.630m	$207,970m	$232,491m
Total Borrowings	$9.197m+$15.666m	$7.248m+$13.787m+$5.286m	$22.784m+$10.857m	$17.565m	$156,995m	$174,816m
Averaged Borrowing Balance (B)		$25.592m	$29.981m	$25.603m	$87.280m	$165.906m
Implied Borrowing Interest Rate (A)/(B)		12.0%	9.8%	15.1%	8.5%	6.9%

Note that the significant drop in borrowings between EOFY2013 and EOFY2014 was largely because $10.857m of 'Optional Convertible Notes' (borrowings) converted into equity over that year.

So why is this information useful?

The FY2016 years interest bill was $11.436m. But what would happen if the interest rate on that increased to the same as that of the previous year (8.5%)? That would mean the interest bill would go up to

$11.436m x (8.5/6.9) = $14.088m

The difference ( $14.088m-$11.436m= $2.652m) adjusted by the 28% company tax rate ( $2.652m x (1-0.28) = $1.909m ) represents the amount that net profit for FY2016 could have gone down with those higher interest rates in place. $1.909m on $15.517m represents a 12% profit drop. It is those kind of headwinds that investors might be facing over the next couple of years that TRA shareholders should know about.

A couple more years worth of results are now out from Turners. So time to revisit this exercise, and check out if my 'headwind' fear was realised.

Turners have not insignificant borrowings. But borrowed funds are not a problem provided they are used wisely and the cost of servicing the loans has not become too risky. How can we judge if this is the case? It is hard for a small investor, with skin in the game, to give a dispassionate view on the topic. But professional lenders are likely to be more dispassionate. The interest rate charges that a company faces can be thought of as a bank's measure of risk for the company.

Question: So how is the 'interest rate charged' trend for TNR looking?

	FY2013	FY2014	FY2015	FY2016	FY2017	FY2018
Interest Expense (A)	$2.928m	$3.857m	$7.381m	$11.436m	$11.350m	$14.344m
Total Liabilities	$70.765m	$52.630m	$207.970m	$232.491m	$384.917m	$437.662m
Total Borrowings	$22.784m+$10.857m	$17.565m	$156.995m	$174.816m	$265.889m	$317.373m
Averaged Borrowing Balance (B)		$25.603m	$87.280m	$165.906m	$220.353m	$291.631m
Implied Borrowing Interest Rate (A)/(B)		15.1%	8.5%	6.9%	5.2%	4.9%

Answer: Pretty favourably, and the fear of rising interest rates was unfounded.

It looks like the banks have confidence in the direction that Turners Automotive Group is heading. We should note though that the general interest rate environment remains benign for all borrowers.

SNOOPY

[peat]

5.1 and 4.9% (the figures werent there so I worked em out myself)
so getting lower all the time then Snoops. the banks must think they're as safe as houses.

[Snoopy]

We are looking here to see if we can apply a Warren Buffett style growth model to value Turners. We are looking for an ROE of greater than 15% for five years in a row, with one setback allowed.

	FY2013	FY2014	FY2015	FY2016	FY2017
NPAT (Turners Limited) (A)	$3.056m	$4.606m	$12.722m	$15.373m	$17.849m
Shareholder Equity (Turners Auctions :TUA)	$17.811m	$13.378m
Shareholder Equity (Dorchester Pacific: DPC)	$33.190m	$74.052m
Shareholder Equity (Turners Limited: TNR)			$121.002m	$129.812m	$171.716m
Total Combined Shareholder Equity (B)	$51.001m	$92.430m	$121.002m	$129.812m	$171.716m
Return On Equity (A)/(B)	6.0%	5.0%	10.5%	11.8%	10.4%

Turners Limited have never achieved an ROE greater than 15%. The latest year deterioration looks unfortunate, but is connected to the timing of the capital raising.

Result: Fail Test

SNOOPY

P.S. The equity raising took place in October 2016, approximately half way through the financial year. This means the new equity was only available to work with from that date. This means a more accurate ROE figure could be obtained by simply using the 'average' shareholder equity between the two most recent end of year balance dates. Using this method:

ROE (2017) = $17.849m /($129.812m + $171.716m)*0.5 = 11.8%

That figure exactly matches the figure from FY2016.

I am not going through the full Buffett analysis for FY2018. The key sticking point is the far from stellar (based on a 15% target) return on equity over many years.

	FY2014	FY2015	FY2016	FY2017	FY2018
NPAT (Turners Limited) (A)	$3.823m	$12.210m	$15.332m	$16.789m	$21.696m (e)
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
Return On Equity (A)/(B)	4.1%	10.1%	11.8%	9.8%	10.1%

(e) Profit for FY2018 assumed to be as declared in first FY2018 profit release statement. In past years the headline declared figure has required significant normalisation corrections once the detailed results are published.

If we remember that the bare ROE figure for FY2017 was distorted because of the capital raising during that year, unfortunately ROE is going backwards, away from our 15% target. Granted I believe that 10.1% is still above the company's cost of capital, but perhaps not by much. The problem is if your return on equity is only just above your cost of capital the company becomes more vulnerable (to ongoing changes in the loan/car market in this instance). It then becomes plausible that return on equity could drop below the cost of capital. And this means the company could start destroying shareholder value, should the business cycle turn. So Warren Buffett would almost certainly not invest in this company. But that doesn't mean TRA isn't a satisfactory investment, using other investment criteria and different expectations.

SNOOPY

[h2so4]

I am not going through the full Buffett analysis for FY2018. The key sticking point is the far from stellar (based on a 15% target) return on equity over many years.

	FY2014	FY2015	FY2016	FY2017	FY2018
NPAT (Turners Limited) (A)	$4.606m	$12.722m	$15.373m	$17.849m	$23.192m (e)
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
Return On Equity (A)/(B)	5.0%	10.5%	11.8%	10.4%	10.8%

(e) Profit for FY2018 assumed to be as declared in first FY2018 profit release statement. In past years the headline declared figure has required significant normalisation corrections once the detailed results are published.

If we remember that the bare ROE figure for FY2017 was distorted because of the capital raising during that year, unfortunately ROE is going backwards, away from our 15% target. Granted I believe that 10.8% is still above the company's cost of capital, but perhaps not by much. The problem is if your return on equity is only just above your cost of capital the company becomes more vulnerable (to ongoing changes in the loan/car market in this instance). It then becomes plausible that return on equity could drop below the cost of capital. And this means the company could start destroying shareholder value, should the business cycle turn. So Warren Buffett would almost certainly not invest in this company. But that doesn't mean TRA isn't a satisfactory investment, using other investment criteria and different expectations.

SNOOPY

If the shareholder equity is increasing every year doesn’t that increase shareholder value?

[BlackPeter]

If the shareholder equity is increasing every year doesn’t that increase shareholder value?

Depends whether they earned the increase or collected it using a capital rise; To answer this question you would need to look at the equity per share - and yes, number of shares did increase as well.

[winner69]

Depends whether they earned the increase or collected it using a capital rise; To answer this question you would need to look at the equity per share - and yes, number of shares did increase as well.

....and how much of the earnings is paid out in dividends

[h2so4]

....and how much of the earnings is paid out in dividends

Dividends have been paid and shareholders net worth has increased and substantially over the years in SD’s time frame. I would think excess cash is being converted to assets all with far from stella ROE.