TRA - Turners Automotive Group

[Basil]

"$4.20's"

no chance then? oh .. bother ... who is going to buy all those petrol engined cars ....

Every Tom, Dick and Harry who wants a good cheap car.

[Waltzing]

Silly of course!!!

Tom, Dick and harry ...

lets hope they save the day !!!

https://www.youtube.com/watch?app=desktop&v=pHj77P1wSeM

[Dolcile]

I have got myself all excited about Turners.  It does look like a well run company - that is growing profit and earnings.   

I am just gutted I missed out on $3.5 shares.   How was it ever trading that low - genuine question for those that have been around a while?

$4.6 still seems a reasonable price with upside. 

[Basil]

Welcome to the forum Dolcile and that's a very good question.
I might take one that seeing as I doggedly backed up the truck @ $3.50.

Turners have sometimes historically claimed their business model was resilient in difficult economic conditions.  Even after reporting a record FY23 result, in the call afterwards in late May 2023 they were very conservative and guarded on the outlook citing very strong economic headwinds and not providing guidance for FY24 at that time.  They also called out very strong headwinds from the costs of financing their loan book which probably gave the market cause for pause and reflection.

I kept buying because I believe in how they're building their brand over time, (Rome wasn't built in a day), and I understand the value of their multi award winning Tina marketing campaign and I think she has a real rock star effervescent marketing personality that their target market really connects with.  Think about the wealth Rod Duke of Briscoes has built with Tammy over the years and you'll get the gist but I think Tina connects with her target market better than Tammy.

I think the half year result and preannouncement leading up to that of another record result for FY24 really caught the market by surprise.  Few really believed they were capable of another record result this year in the face of incredibly strong finance cost headwinds.  I was buying at that level knowing the finance costs headwinds are transitory and eventually their loan book reprices itself so essentially, I was buying there believing the headwinds come out in the wash in future years. 

Hint - It always pays to think 2-3 years ahead with Turners because they are building their brand very strongly over time.  You need to think ahead i.e.  $4.63 might be really, really cheap 2-3 years from now and that's the risk for those thinking of selling into the index inclusion.

I have a very overweight position but frankly, I am really, really struggling, (and that's after a heck of a lot of thought), to think what I would rebalance into if I choose to somewhat rebalance my position in the future.  I am an income and value investor, so I need to see a decent yield, (above 7% or I have no interest and would choose the safety of bonds instead), and a modest PE and the prospect of dividends keeping pace with inflation over time.   Frankly I can't think of any other stock I really like to rebalance into at this point. 

[BlackPeter]

I have got myself all excited about Turners.  It does look like a well run company - that is growing profit and earnings.   

I am just gutted I missed out on $3.5 shares.   How was it ever trading that low - genuine question for those that have been around a while?

$4.6 still seems a reasonable price with upside. 

Good question & yes, welcome to the forum. Adding to basils response (and maybe looking a bit further into the past) to help you to understand the markets reactions ...

If you look into TRA's history - it grew out of a finance company (Dorchester Pacific), which nearly went bust during the GFC and out of an auction house (Turners). Both had their ups and downs in the past and are inherently cylical and risky businesses. Stocks with a risky past tend to spook their investors easier in an established downtrend (one bitten,twice shy).   

If you check TRA's own history over the last decade or so (did they do what they said they are doing?) - they started with great plans to create a "One Stop" car business, bringing everything from purchase over finance, insurance and service / maintenance into one hand. At the time their share price tanked it became clear that they moved away from this target ... and I could well imagine that some of the people believing into their vision just gave up on them during that time, which just helped to maintain the downtrend. 

And yes, it does look like (and I think it is) currently a well run company with a great CEO / CFO team, but as indicated before - this was not always the case, and - you never know, it might not always stay that way. If you want to better understand the past, it might help you as well to have a look through the forum discussions (you need to look into the other channel, this forum does not exist for that long) around the times when the TRA SP was really low. Many investors who love it now did had at that stage rather little confidence into the board (myself included). Well - and SP always reflects investors feelings.

[Dolcile]

Thanks Basil and BlackPeter - that is really useful.

I've been looking at the segment results here for the last 6 years  and I'd love you insights into a couple of things:

1. There are a lot of things going well for the business over the last 6 years, but from a financial perspective the Insurance business has been the star of the show.  It makes me nervous that Revenue has been flat, however, profit has increased from $3.6m (FY18) to $12.6m (FY $12.6m) due to the margin expanding from 7.8% to 28.9%  .

Do you know what has driven such an improvement, it must be some thing fundamental? This is an area that makes me a little nervous - if management were gaming the numbers, the assumption in the actuarial valuation of the Insurance contract liability would be an obvious place.

2. With the talk of the "halo effect" when I looked at the Finance business I expected to see that it would have grown at a similar rate to the Auto retail business.  However, in fact the Revenue growth rate has been almost double (48% v 25%) over the 6 years. Would appreciate any insights you have to on this. 

3. What actually does the Credit business do, and why has the revenue decreased from $18.7m (FY18) to $9.2M (FY23)?

Other than the above, it is fantastic to see margin increasing on Auto Retail and also that corporate costs have tracked down as a percentage of revenue

Cheers
Dolcile

[Dolcile]

Also thanks for the warm welcome Basil. 

I have a fairly large portfolio of index funds but like you, I'm looking to start building a bit of an Income/Dividend portfolio of NZX listed companies.    TRA seems to fit the bill, but there seems to be very few others. 

I am an income and value investor, so I need to see a decent yield, (above 7% or I have no interest and would choose the safety of bonds instead), and a modest PE and the prospect of dividends keeping pace with inflation over time.   Frankly I can't think of any other stock I really like to rebalance into at this point. 

[Ricky Bobby]

What else are you looking at Dolcile?

[Dolcile]

Another couple of questions on the HY24:

1. does anyone know why "Other costs" are up $2m (25%), to $10m?
2. they say they own 14/31 sites that have a cost of $95m. Have they ever given an indication on the fair value of the property portfolio?

[Basil]

I've made quite a few posts today and am a little tired and it is a Sunday so just in brief
Some of the answers you seek are probably in this presentation http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/TRA/422080/407740.pdf

I know from previous presentations and calls that they have done a lot of work around the pricing of policies in their insurance division with Autosure looking very hard at the cost of, for example, mechanical breakdown insurance for European cars.  Also, their insurance division has benefited by the increased interest rate environment with funds invested.   Todd made the point in his recent retail investor call that they have a huge competitive advantage with their nationwide data analytics of vehicle pricing and insurance repair costs.  I think it's clear they've driven a lot more profitability out of their insurance division with smarter pricing.

Oxford finance obviously lends through not just through Turners, but also other outlets as well.

The credit collection and management division has underperformed over the years but they are hopeful of that improving over time.

$2m increase in other cost, no idea sorry but it's not too far out of line with the 15% top line sales growth.  Maybe its extra brand building with an expanded tina marketing campaign?  Would be good to keep an eye on this and ask management at the next call.

They have previously stated that they are quite a long way in credit with the fair market value of their commercial properties which are recorded at cost, forgive me I cannot recall and am too tired to look it up.  Maybe someone else can take that question. 

[BlackPeter]

Thanks Basil and BlackPeter - that is really useful.

I've been looking at the segment results here for the last 6 years  and I'd love you insights into a couple of things:

1. There are a lot of things going well for the business over the last 6 years, but from a financial perspective the Insurance business has been the star of the show.  It makes me nervous that Revenue has been flat, however, profit has increased from $3.6m (FY18) to $12.6m (FY $12.6m) due to the margin expanding from 7.8% to 28.9%  .

Do you know what has driven such an improvement, it must be some thing fundamental? This is an area that makes me a little nervous - if management were gaming the numbers, the assumption in the actuarial valuation of the Insurance contract liability would be an obvious place.

2. With the talk of the "halo effect" when I looked at the Finance business I expected to see that it would have grown at a similar rate to the Auto retail business.  However, in fact the Revenue growth rate has been almost double (48% v 25%) over the 6 years. Would appreciate any insights you have to on this. 

3. What actually does the Credit business do, and why has the revenue decreased from $18.7m (FY18) to $9.2M (FY23)?

Other than the above, it is fantastic to see margin increasing on Auto Retail and also that corporate costs have tracked down as a percentage of revenue

Cheers
Dolcile

I think beagle took already #1 - and yes, I remember as well, that they did some years ago some analysis and discovered that they basically lost money with some of the (mainly European) cars they insured. I suppose they rectified that, which probaly explaines the margin increase for the insurance.

From a personal perspective would I not expect them to be able to keep growing margins at this rate (i.e. this was a one off). If you look at their (Autosure) current insurance conditions and rates ... many of their potential customers might find it in the meantime more economical to pay for a thorough AA check plus self insure for at least one big issue - which would still be cheaper than the cost they now charge for 3 years of insurance plus adding quite unnecessary maintenance costs (like requiring a Diesel service every 10k even if the manufacturer recommends 15k). I know what I am talking about ; So - at best they now maximised what they can extort from their customers.

2) I see Finance and Retail as quite separate parts of the business. Sure - more cars sold might mean more opportunities for finance, but there are as well plenty of potential customers around who won't need finance if they buy a car. Do you expect them to send the solvent customers away, just to improve the ratio of fincanced to sold cars? Personally - I bought a lot of cars in my life, but I never asked anybody to finance the deal. Does this mean I should not bother to go to Turners?

3) Credit business has nothing to do with selling or financing cars. They are basically a debt collection agency for anybody who wants to use their services, I assume a relict of the not always good Dorchester Pacific years ... and as a Turners shareholder you would hope that Turners is not in need to extensively use their debt collection service for their own customers ... bad loans are rarely good business.

[Basil]

I think the word extort is a very strong one BP.  Todd himself has acknowledged Aaron the CFO has a very strong "commercial" focus.  A lot to be admired with a CFO's that not only oversees all the rigorous reporting duties of a listed company but also has a laser focus on helping drive earnings growth.

[BlackPeter]

I think the word extort is a very strong one BP.  Todd himself has acknowledged Aaron the CFO has a very strong "commercial" focus.  A lot to be admired with a CFO's that not only oversees all the rigorous reporting duties of a listed company but also has a laser focus on helping drive earnings growth.

Maybe. And yes, they don't force anybody to sign their contracts. I just see that they in my view reached the peak where they can extract (if you like this word more) the maximum premium out of clients without losing business.

This is good for a business, so nothing wrong about that from a shareholders perspective. Greed is good. It just indicates, that there is (in my view) little additional headroom for them to keep growing the insurance margins.

[Basil]

Maybe. And yes, they don't force anybody to sign their contracts. I just see that they in my view reached the peak where they can extract (if you like this word more) the maximum premium out of clients without losing business.

This is good for a business, so nothing wrong about that from a shareholders perspective. Greed is good. It just indicates, that there is (in my view) little additional headroom for them to keep growing the insurance margins.

Probably fair comment but they are selling more cars and therefore more insurance products at the same or similar high insurance margin = more profit growth for the insurance division.

[Dolcile]

Thanks again all. I managed to pick up a few this morning at an average of $4.63 - so hopefully onward and upwards.