Turners Automotive Group Limited Analysis

Overview

Turners Automotive Group has been formed through the 2014 merger of New Zealand's largest vehicle and machinery retailer, Turners Auctions, and leading consumer finance and insurance business, Dorchester. Turners Auctions was established in 1967 when Turners and Growers Limited began auctioning cars and trucks alongside its fruit and produce business. Today, Turners is New Zealand's largest auction house and vendor of second hand cars, trucks and machinery. Dorchester was incorporated in 1984 as Venture Pacific Limited. The company became Dorchester Pacific Limited in 1992 and over the following years, Dorchester developed a core financial services base through the acquisition of a number of finance companies throughout New Zealand aligned to its consumer finance and insurance strategy. In 2014, Dorchester launched a successful takeover offer for Turners Auctions and consolidated its interests into a single entity that carried the Turners name. The decision to continue the Turners brand recognised the rich history and consumer recognition attached to it. In 2017, Turners Limited changed its name to Turners Automotive Group to enable a Foreign Exempt Listing on the ASX and to reflect the focus of the group on the automotive sector.

The Turners Automotive Group has 3 core operating divisions.

1. The Automotive Retail Division where we control the buying and selling of second hand cars, trucks and machinery to earn a transactional margin and deliver cross-sell opportunities for our Finance and Insurance products. Turners is the largest second hand vehicle retailer in New Zealand.

2. The Finance and Insurance Division where we help customers with simple and attractive finance and insurance products, and through this build annuity revenue streams. Turners has a portfolio of reputable businesses offering finance and insurance products to customers across New Zealand, including personal, motor vehicle loans and insurance.

3. The Debt Management and Credit Collection Division where we help businesses of any size in New Zealand and Australia with collecting debt from customers who are not paying. Turners has a growing presence in the debt management sector in both New Zealand and Australia through its EC Credit Control business.

Performance

The following information was extracted from Turners Limited's full year results, released on 21 May 2024:

Turners delivers record FY24 earnings and lays out roadmap for future growth

Turners Automotive Group (NZX/ASX: TRA) has again delivered record earnings for the financial year to March 31, 2024 (FY24), underscoring its resilient earnings platform, and the value of diversification, integrating the activity and annuity elements of its business.

Despite economic challenges and soft consumer demand, the company achieved its FY24 target a year early, is well placed to exceed its FY25 Net Profit Before Tax (NPBT) target of $50M and today announced its new medium-term target for $65m NPBT in FY28.

Key Financial Highlights:

• Revenue $417m +7%
• EBIT $58.6m up 12%
• NPBT $49.1m +8%
• NPAT $33.0m +1.5% (normalised NPAT $35.1M +8%)1
• Earnings per share (EPS) 37.7cps 0% (normalised EPS 40.2cps +7%)1
• Final dividend declared of 7.5 cents per share (cps)
• Full year dividend of 25.5cps +11%, representing a gross yield of ~9% per annum based on current share price ($4.10)

The legislative change to remove depreciation on commercial buildings has increased the effective tax rate to 33% for FY24. This is a one-off non-cash impact in FY24 only. The effective tax rate over the last two years is between 27.5-28.5%. A normalised NPAT using FY23 tax rate of 28.5% would be $35.1M +8% and EPS would be 40.2 +7%.

Key Business Highlights:

• Auto segment profit was up 27% and constituted more than 50% of group profits. Driven by two new branches launched in FY24, improved sourcing, retail optimisation (from wholesale auctions to retail), growing brand strength, operating efficiencies and solid organic growth across the network.
• Finance segment has weathered the interest rate shock as we deliberately sacrificed some top line growth over the last two years to focus on higher quality borrowers, positioning the segment well as interest rates ease. Net interest margin (NIM) is expanding, following an inflection point during H2 and rate headwinds will now turn into tailwinds. Meanwhile, arrears remain significantly below industry benchmarks.
• Insurance segment increased contribution to profit as a well-tuned business with robust policy sales, well managed claims and improved investment returns. Notably claims cost inflation was offset by reduced frequency of claims.
• Credit Management business has turned a corner with debt load recovering in line with a tightening economy, particularly in SMEs. The business is well-placed for growth as the economy tightens and debt value load continues to increase.
• A strong culture remains a key advantage, ranking in the top 5% of consumer businesses globally using Peakon (employee engagement tool). 50% of the team took up the Employee Share Scheme offer.
• Outlook: An anticipated deterioration in economic conditions during HY25, combined with cycling against a high-growth HY24 comparative period arising in part from extreme weather events, means we expect HY25 to be testing. Our near term focus remains on exceeding the $50M NPBT goal in FY25, despite the economic backdrop. Beyond FY25, Turners is well-placed to continue to make strong progress, thanks to the resilience of a diversified business model (activity and annuity), and clear strategy for further growth.