Announcement
HALFYR: TRA: Turners delivers 11% increase in underlying NPBT
08:55am
TRA
27/11/2019 08:55
HALFYR
PRICE SENSITIVE
REL: 0855 HRS Turners Automotive Group Limited
HALFYR: TRA: Turners delivers 11% increase in underlying NPBT
Company Announcement
27 November 2019
Turners Automotive Group delivers 11% increase in underlying NPBT
o Underlying NPBT increased 11% to $14.8m
o NPBT down 12% to $14.8m (HY19 NPBT of $16.8m includes gain on sale of
property of $3.5m)
o Group revenue increased 1% to $171m
o Solid gains in the finance, insurance & credit management businesses
o Market share gains partially offset North Shore branch closure and a soft
used car market
o Quarterly dividend of 4cps declared. Projected 17.0cps annual dividend
(FY19: 17.0 cps)
o On-market share buyback concluded, with 4.5% reduction in issued shares at
an average price of $2.32/share
o Continued to progress strategic plan with focus on increasing auto retail
market share, continued site expansion, de-risking of Oxford Finance, and
market-leading technology investments
o Oxford process concluded, significant interest above book value, but in the
Board's view, the offers did not fully reflect the intrinsic value of the
business
o Turners will undertake a strategic review of EC Credit Control in FY21
o NPBT guidance for FY20 is $28-30m. At the mid-point of $29.0m this
represents a 12% improvement on FY19 underlying profit.
Financial results
Turners Automotive Group (NZX: TRA) delivered an 11% increase in underlying
net profit before tax (NPBT) from $13.3m to $14.8m for the six months ended
30 September 2019. Revenue increased by 1% to $171m (HY19: $168m). Three out
of four business segments recorded gains during the period.
"We are pleased with this robust result, with three of four business segments
recording gains in underlying profit." said CEO Todd Hunter. "Our largest
segment, Auto Retail, outperformed market conditions as we continued to
succeed in growing market share. Meanwhile, we started to execute on our
strategic plan, which was communicated to the market in May 2019. "
Excluding the $3.5m gain on property sale in HY19, underlying revenue
increased by 3.6% or $6.0m. Auto Retail delivered higher unit sales of owned
stock, up 6% year-on-year, while Finance revenues have grown as a result of
directing Turners origination into Oxford. Both of these offset a small
decrease in Insurance revenue due to implementation of higher underwriting
standards and a softer used-car market.
Reported NPBT, which is the basis for Turners' full year guidance, decreased
to $14.8m (HY19: $16.8m) with net profit after tax (NPAT) of $10.7m.
Excluding the gain on sale of property of $3.5m in HY19, Underlying NPBT
increased by 11% to $14.8m, driven by gains made in the Insurance, Finance
and Credit divisions. NPBT for FY20 is expected to range between $28m and
$30m.
Earnings per share were down 18% to 12.4 cents per share for the half year,
reflecting a higher average number of shares on issue in HY20, a higher
effective tax rate in HY20, and the property gain of $3.5m in HY19.
Shareholder equity increased to $220m (HY19: $217m) as at 30 September 2019.
Dividend
In May 2019 the Board increased the dividend payout ratio to 60-70% of net
profit after tax (NPAT). This reflects their focus to return value to
shareholders. The Board declared a second quarter fully imputed dividend of
4.0 cents per share, resulting in half year dividends of 8.0 cps. The Board
is projecting a 4.0 cps dividend in Q3 and 5.0 cps in Q4, implying a 17.0 cps
annual projected dividend (FY19: 17.0 cps, FY18: 15.5 cps). The projected
payout of 17.0 cps (fully imputed) to shareholders represents a gross
dividend yield of 9.4% at an indicative share price of $2.53.
Strategic update
Turners communicated a Strategic Review to the market in May 2019. With a
focus on sustainable growth, Turners' strategy is to simplify the business,
accelerate growth in a capital efficient way and de-risk the business by
focusing on its strengths. Through both increasing market share and
establishing a growth platform that enables swift progress on new
opportunities, Turners will continue to focus on long-term shareholder value
and a resilient business model.
Turners has outlined five strategic themes:
1. Market share
Turners currently maintains ~6% market share of the used car retail
transactions and will concentrate on increasing this through optimising
existing branch networks, creating new consignment relationships, expanding
its retail footprint and taking advantage of market consolidation.
2. Car market
Turners remains confident in the medium term demand within the broader
market. With nearly 25% of the ~4m cars registered on NZ roads being 20 years
or older, there are a large number of cars that need to be replaced in the
medium term.
3. Oxford finance
Successful de-risking of Oxford finance through focusing on higher quality
borrowers has led to a significant improvement in arrears and performance.
Turners will continue to drive profitability from this division.
4. Property investment
Turners strategy to grow its New Zealand footprint and optimise existing
sites through strategic property investment is well underway with four
committed projects (new and relocations) over the next two years and five
potential sites being investigated.
5. Technology
With a technology team of 29 and growing, Turners continues to see investment
in "Auto-tech" as critical to building competitive advantage, particularly in
the area of data and digital.
Grant Baker, Chairman, commented: "Our new strategic plan positions us well
to benefit from our competitive advantages throughout the cycle. We are well
placed to put the foot down to expand our footprint to leverage the growing
strength of the Turners brand. We are particularly focused on our own
"auto-tech" initiatives, where we will continue to invest in a disciplined
fashion to exploit our advantage in data and digital."
Funding and buyback
Turners' funding capacity is currently $320m with $72m undrawn. The increase
in the securitisation warehouse facility reflects Turners Cars origination
directed into Oxford and away from MTF. The securitisation funding facility
limit is at $200m (including capital contribution from TRA), which is
expected to be extended in Q1 2020.
The on-market share buyback scheme reduced issued shares by 4 million (4.5%)
at an average price of $2.32.
Segment results
Turners' strategy of retail optimisation is delivering good growth in retail
market share. Whilst the used-car industry has softened due to reduced
consumer confidence, Turners is confident that its growth plans will deliver
for the company. Further consolidation is expected in the used car market as
a result of the upcoming regulatory changes (mandatory Electronic Stability
Control on all imported vehicles) which will provide further opportunity to
build Turners' retail market share. The Insurance, Finance and Credit
businesses have all performed at or above expectations.
Auto Retail (Turners Group): Revenue $115.9m +4%, Op profit $7.3m -8%
The Automotive Retail division revenue increased by 4% to $115.9m (HY19:
$111.8m) reflecting the higher number of "owned" cars sold. However,
operating profit dropped 8% to $7.3m (HY19: $8m), reflecting reduced margins
on used imports, a drop in lease consignment vehicles and the temporary
6-month closure of the North Shore branch. Meanwhile NPS (customer
satisfaction score) increased to 68 from 49 in HY19, reflecting ongoing
training and focus on the customer experience provided in-branch and online.
BuyNow retail sales increased 1% year-on-year with the opening of the New
Plymouth and Whangarei branches. This was offset by the closure and
relocation of the North Shore branch. The new site development has gone very
well and North Shore trading is building in-line with expectations.
Inventory values reduced by 15% to $36m, with the focus on being more
efficient and ensuring the business is a high turnover operation. Unit sales
of owned stock increased 6%, however, margin per unit was down 11%. Locally
sourced vehicle margin increased by 5%, however, used import margins were
down 16% due to increased supply chain costs and the weakening New Zealand
dollar impacting margins on used import vehicles. There was less consignment
stock from lease vendors as Turners' cycled off a strong return period in
HY19 (1,000 units less in HY20). Damaged vehicle units increased 4% with some
good gains from existing insurance vendors. The division also implemented
$500k of cost reduction initiatives during HY20 largely within the rebranded
Buy Right Cars business.
Finance (Oxford Finance): Revenue $22.8m +6%, Op profit $6.5m +20%
The Finance division had a solid half-year with revenue up 6% to $22.8m
(HY19: $21.6m). Operating profit increased 20% to $6.5m (HY19: $5.4m),
reflecting the significant improvements made in the quality of loans
originated. Consumer loans originated in HY20 has a total arrears percentage
of 2.4%, which is running at half the levels experienced in HY19. This has
helped drive an overall improvement in consumer account balance arrears in
the first half to 8.2% (HY19 9.0%).
Initiatives including the introduction of comprehensive credit reporting and
implementation of a 3-tier risk pricing model, have contributed to the
improving quality of new business. Turners Cars lending was particularly
strong, ramping up to $24m in HY20 (HY19: $7.0m).
As part of the May 2019 Strategy Refresh, Turners conducted a comprehensive
Strategic Review to consider alternative ownership and growth options for
Oxford Finance. Investment bank Jarden were appointed to run a process for
interested parties, which was concluded in September.
Whilst there was significant interest in Oxford Finance above the book value
of the business, in the Board's view, the offers received did not fully
reflect the intrinsic value of the business, both today and especially
factoring in the planned organic growth. This view was supported by separate
valuations from two corporate advisors. The Board therefore decided to
conclude the strategic review and is excited to focus all efforts on the
execution of the growth strategy.
Insurance (Autosure): Revenue $22.2m -13%, Op profit (excluding property
profit) $2.6m +16%
Insurance revenue decreased 13% to $22.2m (HY19: $25.7m), with General Gross
Written Premium (GWP) down 6% to $17.5m as a result of market conditions and
focusing on lower risk portfolios and vehicles.
Underlying profit increased 16% to $2.6m (HY19: $2.3m) as a result of the
improvement in claims loss ratios and the improvements in risk pricing work
that has gone on. The combined claims loss ratio is currently 60% (HY19:
63%), while the MBI loss ratio is a 68% (HY19: 72%).
All dealers are now transitioned to a new retail policy generation system
which has provided further opportunity to manage portfolio risk. Turners will
continue to review dealers' portfolio performance for risk pricing. The
company is also pleased to have completed a culture and conduct review well
ahead of the timeframe outlined by the Reserve Bank.
In November 2019, Turners agreed a Distribution Agreement with Heartland Bank
between their respective brands, Autosure and MARAC. This enables Autosure
products to be sold at point of sale through Heartland's consumer
intermediary network from mid December 2019. Turners expects this to increase
the dealer network by 20% and $2m additional annual GWP from Q4 FY20.
Credit Management (EC Credit Control): Revenue $9.9m +7%, Op profit $3.6m
+17%
Credit management revenue increased by 7% to $9.9m (HY19: $9.3m). Profit up
17% to $3.6m (HY19: $3.1m). This is largely due an increased debt load up 17%
to $133m mostly from New Zealand corporate clients as a result of EC Credit
Control's positive performance in collection metrics. Commission earned from
debt collected increased 21% to $4.5m.
The division recently completed Xero and MYOB integrations and within a few
months more than 150 customers have connected. Also pleasingly the business
has significantly improved contact center staff retention with a more
concerted effort on leadership training and a review of remuneration. Turners
will undertake a strategic review of EC Credit Control in FY21.
Digital, Data and Disruption
Turners is pleased with the shifts that have been made in the area of digital
marketing with a material increase in social channel marketing. Measurement
has been a key area of development and the objective is to improve the
customer conversion rate over the next 24 months. Pleasingly a 5% lift in web
traffic has been seen since the rebranded Buy Right Cars inventory was
included on www.turners.co.nz and digital marketing activity was lifted.
The initial results from the work with KPMG have been promising with the
initial focus on developing tools to help understand vehicle profitability
better. This will help target purchasing the right cars. Turners will
continue to invest in this area and sees this being a key competitive
advantage for Turners in the future.
Turners also made its first innovation investment into Collaborate Corp
(CL8.ASX) in July this year. CL8 have launched vehicle subscription business
Carly, with advanced plans to bring this to NZ in Q4 FY20. Turners is pleased
with the progress seen in the Australian business and the traction it is
getting with the industry and consumers.
Outlook and Guidance
Turners will continue to focus on organic growth in all its business
divisions, but in particular is looking to build on the brand strength in
"Turners" and grow the Auto Retail market share. This will come through
branch expansion and continuing to optimise the existing network for retail
customers.
With the introduction of ESC (Electronic Stability Control) as a compulsory
feature for all vehicles imported into New Zealand from Mar 2020, Turners
expects to see the used car industry consolidate further over 2019/2020
particularly for smaller dealers selling low priced vehicles. This market
consolidation is seen as a positive for Turners.
Within finance and insurance businesses, Turners current strategy will
continue to focus on organic growth through improving the underwriting
standards, in addition to looking for opportunities to broaden distribution.
The Board is not expecting any significant one-off gains or losses in H2 and
gives net profit before tax guidance of between $28.0m to $30.0m for FY20.
ENDS
About Turners
Turners Automotive Group Limited is an integrated financial services group,
primarily operating in the automotive sector www.turnersautogroup.co.nz
For further information, please contact:
Todd Hunter, Chief Executive Officer, Turners Automotive Group Limited, Mob:
021 722 818
Media Liaison and Assistance: Jackie Ellis, Mob: 027 246 2505
End CA:00344980 For:TRA Type:HALFYR Time:2019-11-27 08:55:50
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