Turners Auctions (TUA) & Summary 1

[duncan macgregor]

SNOOPY, I only said that i couldnt be bothered working anything out. Tell me the real price or i lose interest right at the start. Its a buyers market complicate that at your peril. In the good old days auctions were sold in Guiness ?[spelling], Which was one shilling in the pound, with the seller getting that figure in pounds and the auction house the shilling. Easy understandable system giving roughly five pc to the auction house. I simply cant be bothered and know lots of people in a similar category, so TUA pay attentionn you lost my interst before i started. Macdunk

[all-ears]

Oh Dear......5cps div.....followed by 15cps fall in share price. Hope you all listened to me a few weeks ago.

All-ears

[all-ears]

Snoopy,

Yes, TUA charge both buyer AND seller. They gross close to $1,000 revenue from the ave car sold. This is contributed as follows.

The buyer of an unreg import will cough up an additional $680 over an above the auction purchase price. If it's a second time round reg car, they'll be flogged an additional $375 above the purchase price.

The seller of the that $5,000 car will be charged $500 as well. So in short, the seller gets $4,500, and the buyer pays $5,680 (unreg import). A difference of $1,180. Both buyer and seller are significantly worse off by using TUA compared to say Trade-Me or private (seller to buyer) transactions.

The above is an actual example of the TUA "recipe for failure". This is why your shares are only worth 60c today and will become worthless as time goes on. Once you change the business plan to one of failure, based on doing what's best for yourself (the business) in the short term, instead of doing what's best for the customer, you're on your way to oblivion.

Now for that additional cash that's been divi'd out, mostly to the 3 controlling shareholders.

Each of these shareholder has been responsible for appointment of the Directors. These Directors have destroyed the value of the company from $5.35 per share to now 50 to 60c per share. They need as much of the remaining "silverware" as they can get their slippery fingers on. The way to do this is "cash-up" the silverware (stock) and divi it up. You will recall my posts long ago when I told you that there was an increasing amount of current asset value listed as stock. The "true" value of this stock would be realized in time and I questioned the amounts stated as to how realistic they were. You now have your answer. I was right.

Those of you remaining shareholders.......why didn't you listen. I didn't come down in the last shower, and I'm happy to say I made significantly more last year, than your directors made for your company.

Put simply, maths are maths. The maths of TUA don't stack up with their current business plan. They had an opportunity to do something about this a few years ago, but have continually declined. I guess they are trying to save face, at your expense.

The "Fish n Chip" shop is actually doing quite well.

All Ears ----Still Listening!

[Deev8]

Profit after tax for the half year to 30th June 2009 was $1.4m, up 69% on last year's poor result. And another 5c dividend declared.

TUA - Half year to 30/6/09

Looking ahead the company say:
With the reduction in the cost base, growing market share, key customers retained and a New Zealand used vehicle market that is showing early indications of recovery, the Company is forecasting a full year net profit after tax in the range of $2.6 million to $2.8 million.

[Snoopy]

Originally Posted by Deev8

Profit after tax for the half year to 30th June 2009 was $1.4m, up 69% on last year's poor result. And another 5c dividend declared.

I guess you will be looking for some industry comment from All Ears, Deev8. However, I think you will be unlikely to find it. Now that the tide has turned for TUA and All Ears has downramped to death, I reckon All Ears will be stocking up on TUA again. No point in letting the industry outsiders, like me, into the good news. The smart insiders will keep their lips zipped and buy buy buy.

However there is a new wildcard coming into the equation. And that is the arrival of Chinese cars. A new car for the price of a used import? For some customers that could be worth a bite. And those customers that do bite, won't be coming back to Turners or any other second hand dealer for that matter. Perhaps All Ears is even eyeing up a move into the Chinese sourced carmarket himself?

SNOOPY

discl: hold TUA

[Deev8]

Originally Posted by Snoopy

I guess you will be looking for some industry comment from All Ears, Deev8.

Said with tongue firmly in cheek, I'm sure. But to be serious for just a moment - I always treat the views of "industry insiders" with some caution, not because I assume their comments are driven by self-interest although of course they might be. It's more that while they may have access to more data, their insider position often means they aren't in the best position to evaluate that data dispassionately.

And I certainly wouldn't be interested in another share price prediction based on all of that insider information. In January we were treated to this:

Originally Posted by all-ears

The price many shareholders paid was up to $5.35. What they get now of course is a little over 40c. But then some of us know why this will fall to my predicted 30c shortly ... There's far better listed companies to invest in, in 2009.

This is what has happened since then:



The shares have moved up from 45c to $1.00, and two 5c dividends have been declared as well.

[Snoopy]

Originally Posted by Snoopy

SUMMARY

Despite being a leading player in the industry, profits and margins are shrinking year by year. For the first time return on shareholders capital drops into single figures. The company may have got the attention of White River Partners of the United States who hold 11.5% of the shares on issue. But on the numbers I have calculated, there is absolutely no chance of that other well-known US investor, Warren Buffett, joining them on the share register. This company need not proceed to the next level of analysis.

SNOOPY

Discl: hold TUA

The TUA 2009 business year still has three months to run. So it is perhaps rather early to get some definitive numbers. But unlike almost every other company, TUA have given us a forecast of the future. So some management informed speculation is in order.

3/RETURN ON EQUITY (>15% for 5 years, one setback allowed)

2005: $6.192m/$22.245m= 27.6%
2006: $3.75m/$21.830m = 17.2%
2007: $2.925m/$20.505m= 14.2%
2008: $0.7478m/$19.518m= 3.8%
2009(*): ($2.6-$2.8m)/$19.526m= 13.3%-14.3%

(*) Estimate by TUA management

Conclusion: No

We can see that even with profits at the upper end management expectations, TUA will fail the return on equity test. In the consolidated interim income statement I note that the advertising spend has been reduced by $1m in HY2009. Turners simply winding back their television advertising campaign could explain that difference. If that advertising spend had been maintained then the operational first half result is actually flat, not up 69% as TUA claimed. By my reckoning this makes the TUA recovery tenuous. However, points were earned in my estimation for staying in business and staying profitable when rivals Hammer Auctions and many car yards fell by the wayside.

Nevertheless at the moment TUA should be looked on as a yield play for investment purposes. If TUA can maintain their 5c half year dividend on their second half result, as hinted in the forecast, that gives a gross dividend yield of:

10/115*(0.7)= 12.4%

based on a share price of $1.15. That shows to me that the more than doubling of the TUA share price in recent months has been well justified. Even if where the share price goes from here is less certain.

SNOOPY

discl: hold TUA

[Deev8]

Originally Posted by Snoopy

The TUA 2009 business year still has three months to run. So it is perhaps rather early to get some definitive numbers. But unlike almost every other company, TUA have given us a forecast of the future. So some management informed speculation is in order.

3/RETURN ON EQUITY (>15% for 5 years, one setback allowed)

2005: $6.192m/$22.245m= 27.6%
2006: $3.75m/$21.830m = 17.2%
2007: $2.925m/$20.505m= 14.2%
2008: $0.7478m/$19.518m= 3.8%
2009(*): ($2.6-$2.8m)/$19.526m= 13.3%-14.3%

(*) Estimate by TUA management

With a while still to go before the year end Turners have revised their profit forecast upwards.

Turners Auctions upgrade 2009 Profit forecast

"As a result of strong third quarter results Turners Auctions is revising expectation for NPAT for the 2009 year to be in the range of $3.1M - $3.3M. At the time of the half year result announcement in August guidance was given to the market of a NPAT result in the range of $2.6M - $2.8M. "

[Snoopy]

Originally Posted by Deev8

"As a result of strong third quarter results Turners Auctions is revising expectation for NPAT for the 2009 year to be in the range of $3.1M - $3.3M. At the time of the half year result announcement in August guidance was given to the market of a NPAT result in the range of $2.6M - $2.8M. "

A $3.273m just announced full year result is right at the top of the indicated profit range. This is an excellent result for TUA, given that the overall used car market has continued to decline. The headline articles report that full year profit has tripled. In fact the underlying profit has more than quadrupled. That is because the previous profit period contained a write back provision on the year before that's fraud provision.

Before we get too carried away, I should point out that turnover has reduced to FY2006 levels and annual profit is still below the net $3.75m achieved that year. What is clear, despite at least one competitor car Auction business opening in Auckland on the Great South Road in recent months (is that you All Ears?), is that Turners Auctions have made big gains in market share. And if this is the kind of result TUA can turn in while the market declines, how well will they do when the inevitable upturn comes? My personal view is that any upturn when it comes will be weak. I expect difficult market conditions to continue for at least another year, which is why the share price powering through to $1.45 today came as a shock. Yet even at $1.45, that gives an historic PE of 15. That is not out of the way when some serious growth is to be expected in the future. TUA pay out all of their profits as dividends and that means at $1.45 TUA is on a gross yield of 11.8%, (based on the 30% company tax rate). That makes it difficult to mount an argument that at $1.45, TUA is overvalued.

Todays share price move puts me 'back in the black' on what some would say were my ill timed purchases of previous years. During this period of 'suffering' I received fully imputed dividends to the extent of 8c in the second half of CY2006, 13c in CY2007, 7.2c in CY2008 and 10c in CY2009, or 38.2cps in total, or a 10.9cps average over 3.5 years. Using my average per share purcahse price of $1.37, this gives me an average annual net yield of 8% (11.4% gross), excluding capital gains. Given the turbulance of world markets over that time, and the very low interest rates my capital would have got invested in the bank I would consider this an excellent result.

So will I be selling my shares now and banking those capital profits? Absolutely not. I think there is much more to come from this one.

SNOOPY

discl: hold TUA

[Snoopy]

1/ BUSINESS SCALE (Top 3 in chosen market)

Turners Auctions is the largest auction house in New Zealand with 10 geographic sites nationwide. Other companies with smaller scale vehicle auction businesses in New Zealand include: ManheimFowles (Auckland, Christchurch) and Ezybuy (Auckland) Safeway Auto Auctions (Tauranga). I leave out Trademe as a direct competitor because Turners use Trademe to promote their own stock , which means it has become an alternative promotional channel for the physical auction business, more than a direct competitor.

In effect Turners are two businesses: an ‘external auction business’ and an ‘internal auction business’ called Turner’s Fleet where Turners buy their own stock from Japan and compete with the car dealers.

From p10 of the Annual Report:

“The New Zealand used vehicle market declined a further 5% in 2009.”

“In December 2009 there were 2,283 licensed motor vehicle dealers. This has dropped by 25% since the peak level of just over 3,000 in 2006..”

“However, despite the carnage occurring in the used vehicle markets , (Turners external) auction revenues have held up well at $36.6m, up slightly from $36.5m.”

Conclusion : Yes

2/EARNINGS PER SHARE (increasing 5 year trend, one setback allowed)

2005: $6.192m/27.4m= 22.5cps
2006: ($3.122m+$0.628m)/27.4m= 13.7cps
2007: [($2.274m+0.67($0.972m)]/27.4m= 10.7cps
2008: [($1.067m-0.7($0.456m)]/27.4m= 2.7cps
2009: $3.273m/27.4m = 11.9cps

Notes:

1/ 2006 result adds back in losses from the North American operations that were discontinued during that year (p9 Annual Report).
2/ 2007 and 2008 results exclude the effects of an internal criminal fraud uncovered during FY2007.

Conclusion: No

3/RETURN ON EQUITY (>15% for 5 years, one setback allowed)

2005: $6.192m/$22.245m= 27.6%
2006: $3.75m/$21.830m = 17.2%
2007: $2.925m/$20.505m= 14.2%
2008: $0.7478m/$19.518m= 3.8%
2009: $3,273m/$20.035m= 16.3%

Conclusion: No

4 INCREASE MARGIN ABOVE THE RATE OF INFLATION

Margin = Annual Profits/Annual Sales

2005: $6.192m/$75.747m= 8.2%
2006: $3.75m/$70.707m = 5.3%
2007: $2.925m/$85.240m = 3.4 %
2008: $0.7478m/$77.731m= 1.0%
2009: $3.273m/$70.351m= 4.6%

Conclusion: No

SUMMARY

US investor, Warren Buffett, won’t be making an appearance on the share register with results like this, even if things are improving. This company need not proceed to the next level of analysis.

SNOOPY

Discl: hold TUA

[Snoopy]

Originally Posted by all-ears

Those of you remaining shareholders.......why didn't you listen. I didn't come down in the last shower, and I'm happy to say I made significantly more last year, than your directors made for your company.

Put simply, maths are maths. The maths of TUA don't stack up with their current business plan. They had an opportunity to do something about this a few years ago, but have continually declined. I guess they are trying to save face, at your expense.

All Ears ----Still Listening!

This is a classic example of why "investing the Warren Buffett way" is not the only way to do things. I have been a shareholder for only 3.5 years and according to some I have done everything wrong in my purchasing strategy. As a result my average purchase price is $1.37.

Yet since I have been a shareholder, dividends to the extent of 45.2c (of which 7cps is yet to be paid) have been declared. Add that to my 6cps capital gain (TUA trades infrequently but there are buyers there at $1.50 cum dividend today) and my effective gain per year since holding has been 14.6cps. That is a net 10.6% annual return on my investment (gross 15%, a Warren Buffett level of return). Given how financial markets in general have performed over my holding period I couldn't be happier with this result. Yes I know that others, buying lower, will have done better. Good on them, but have they *really* done better?

Those who have reported getting in at a good price have also reported not being able to buy the number of shares they would like. Some calculate that if they were the only market participant they would have had plenty of chances to accumulate the shares they were after. Of course they forget that they are not the only market participant! This is why I maintain that if you want a meaningful number of shares, buying when you perceive them to be 'cheap enough' (whether the share price is going up down or sideways) is the only option when share trading is thin. The likes of growth at a reasonable price Warren Buffett may not be a buyer. But with no term debt on the books, this was always a relatively safe buy on the market. And the market delivered the cheap price that made the investment worthwhile. It seems to be only in New Zealand where great dividend yields like this are regularly available.

Interestingly some of the biggest losers during the year were from the founding family: Heather Patricia Turner and Grahame Harvey Turner seem to have quit nearly half of their holdings, most likely at discounted rates. New on the top 20 shareholder list is Walker & Hall Fine Gifts Limited. Perhaps they see TUA as a potential takeover target to add to their NZ retail empire?

Turners management haven't commented in number terms on the future. But I think that the worst case outlook for 2010 is a repeat of the 2009 profit. And if all four quarter sales can match the last quarter of 2009 then a 10% lift in gross income should largely flow through to the bottom line. That means a $3.6m profit projection for 2010 and a forecast PE of 12 (with the share price at $1.50) with more growth to come in 2011.

Needless to say I am in no hurry to sell my TUA shares. And I remain indebted to All Ears for bringing this excellent investment opportunity to my attention.

SNOOPY