Announcement
FLLYR: TRA: Strong FY20 result for Turners, and Q1 recovery underway
09:02am
TRA
18/06/2020 09:02
FLLYR
PRICE SENSITIVE
REL: 0902 HRS Turners Automotive Group Limited
FLLYR: TRA: Strong FY20 result for Turners, and Q1 recovery underway
Company Announcement
18 June 2020
Strong FY20 result for Turners, and Q1 recovery underway
o NPBT in line with pre Covid-19 guidance at $29.1m (FY19: $29.0m)
o Underlying NPBT increased 11% to $28.8m (FY19: $26.0m)
o Group revenue decreased 1% to $333m
o Solid gains in the finance, insurance & credit management businesses
o Auto retail impacted by slowdown in last 6 weeks of FY20 due to Covid-19
o Solid market share gains, within the context of a softening used car market
o Final dividend (incorporating Q3 deferred dividend) of 6.0cps declared,
taking full year dividends to 14.0cps (FY19: 17.0 cps)
o Positive response to Covid-19 situation from Turners staff, landlords and
business partners. Trading levels so far ahead of "best case" scenarios
modelled in early April. Robustness of diverse portfolio of companies is
proving its worth
o Plan to continue to progress strategic plan with focus on increasing auto
retail market share, continued retail optimisation, ongoing de-risking of
Oxford Finance, and market-leading technology investments
Financial results
Turners Automotive Group (NZX: TRA) delivered an 11% increase in underlying
net profit before tax (NPBT) from $26.0m to $28.8m for the year ended 31
March 2020. Revenue decreased by 1% to $333m (FY19: $337m).
"We are really pleased with the growth in underlying profits over FY20,
despite the early impact of Covid-19 in the last 6 weeks of the financial
year" said CEO Todd Hunter. "We set about at the beginning of FY20 to really
push for organic growth. We have achieved that in 3 out of our 4 businesses
and were on track to achieve this with 4 out of 4 until Covid-19 hit."
Auto Retail has continued to grow retail market share and we have increased
the numbers of "owned inventory" sold by 8% year-on-year but a reduction in
consignment business and impact of Covid-19 has resulted in a small decrease
in revenue. Finance revenues have grown as a result of directing Turners
origination into Oxford. Insurance revenue has reduced due to the one-off
impact of property sale in FY19 ($3.0m) and the further risk optimisation we
are running through the portfolio. We expect consolidation in this industry
and we note that during the GFC, the number of dealers reduced by around 15%.
Turners is in a strong position to grow market share.
Reported NPBT was at $29.1m. This was in-line with guidance of $28- $30m and
stable on FY19 NPBT of $29.0m. Net profit after tax (NPAT) was $21.0m (FY19:
$22.7m). Underlying NPBT increased by 11% to $28.8m. This increase was driven
by gains made in the Insurance, Finance and Credit divisions, partially
offset by a small drop in Auto Retail due to Covid-19.
Reported earnings per share was down 8% to 24.4 cents per share largely
reflecting a higher effective tax rate in FY20. Shareholder equity decreased
to $223m (FY19: $226m) as at 31 March 2020.
Dividend
In March 2020 the Board deferred the Q3 dividend payment as a cautionary step
due to the uncertainty surrounding the length of a L4/L3 lockdown. Now that
we have April and May behind us and a better understanding of how business is
tracking, the board have declared a final fully imputed dividend
incorporating the Q3 deferred dividend of 6.0 cents per share resulting in
full year dividends of 14.0 cps. The board believes this best ensures our
ability to navigate the volatility and also the optionality to take advantage
of any upcoming opportunities. Based on a FY20 payout of 14.0 cps (fully
imputed) to shareholders this represents a gross dividend yield of 9.8% at an
indicative share price of $1.98. The board's intention at this stage is to
continue dividend payouts at the level of the current policy for FY21 which
is 60-70% of net profit after tax.
COVID-19 Response
The Turners team has reacted in a positive manner through the pandemic. Our
business was hit hard during April (57% drop in revenue compared to April
19). However, the business has recovered faster during May than our scenario
planning suggested back in April. In April three out of four businesses were
profitable and in May all four businesses were profitable. Group profit
excluding the government wage subsidy was a loss of $424,000. In May this has
improved significantly to $1.58m, and June overall is tracking ahead of June
2019 in almost every critical measure.
We have been grateful for strong levels of support from our team, our
customers, our landlords and our business partners. The sudden change brought
about by COVID-19 required dynamic planning and execution urgency. Set
against the unprecedented backdrop of a high level of uncertainty, we
identified the following priorities at the end of March:
1. Ensure the safety of our people and our customers
2. Ensure the business could survive and emerge from a 3 to 6 month lockdown
3. Avoid a dilutive capital raise event if possible
4. Position ourselves to take advantage of the opportunities that will
eventuate
We are very pleased that the country has emerged from highly restricted
lockdown and we have achieved our first 3 priorities. We are now focused on
the opportunities to grow this business. We have been successful in reducing
costs through rental relief, government wage subsidies, staff reducing work
hours and using annual leave balances, travel and other expenditures. The
used car market has shown considerable resilience in previous downturns and
early indications are supporting this theme. We know customers will be more
likely to trade with businesses who have a strong brand and reputation like
Turners and we believe this is the time to build market share.
We will continue to de-risk the finance business, following a substantial
improvement in credit quality over the last 2 years. Over and above our
standard finance receivable provisions, an additional COVID-19 overlay of $1
million has been applied to mitigate any potential increase in credit losses
over the next 12 months. With Insurance, we are focused on distribution and
cost and claims management. In Credit Management we are focused on protecting
and managing the reputations of our corporate customers like banks and
government departments that we collect for.
Auto Retail (Turners Group): Revenue $224.9m +0%, Operating profit $13.8m
-24% (FY19 $18.3)
Underlying Segment Profit $13.3m (FY19 $14.9m)
Turners' strategy of retail optimisation and the continued transition of
wholesale to retail is continuing to deliver growth in retail market share.
During all of FY20 we observed a softening of the used car market due to
reduced consumer confidence and this decline was suddenly exacerbated during
late February and March 20 due to the Covid-19 pandemic. There has been a
cyclical reduction in consignment vehicles (down 26%) through the Turners
business in FY20, however this reduction was somewhat offset by an increase
in sales of owned inventory (up 6%) with average gross profits per unit up
12% to $529. FY19 results included a one-off property settlement gain of
$3.4m.
We have a particular focus on optimisation of footprint. We have made some
important decisions in regard to the Auckland footprint and will be leaving
the main Penrose "supersite" in December 2020. Around the same time, we will
bring on stream new retail sites in Westgate and Mt Richmond which will
enable a better retail experience for our customers. Penrose was established
as a wholesale auction facility twenty years ago and is no longer appropriate
both in terms of a cost base or customer experience.
We have successfully integrated the Buy Right cars business into the Turners
cars business over the year. We started with the brand consolidation early in
FY20 and this has now been extended to core IT and operational systems which
will enable further efficiencies.
BuyNow retail sales were down around 0.5% year on year, which considering the
impact of Covid-19 we were pleased with. A new Dunedin branch at double the
previous footprint, and new sites in Westgate and Mt Richmond should see
further gains made in retail sales over the next 1-2 years, depending on the
speed of recovery in the economy.
Damaged vehicle units were up 12% with some good gains from existing
insurance vendors and the benefit from one-off events like the Timaru hail
storm and flood damaged cars from Sky City.
Finance (Oxford Finance): Revenue $45.7m +4%, Operating profit $12.2m +10%
Underlying Segment Profit $12.1m (FY19 $10.3m)
The Finance business had an excellent year. This reflects our increasing
focus on lending to higher quality borrowers. Operating profit increased 10%
to $12.2m (FY19: $11.1m). We introduced 3 tier risk pricing in August 2019
which has enabled us to be much more targeted towards high quality borrowers
and tighten up at the lower end of the quality range. Premium Tier risk now
accounts for 11% of our total existing book and on a new lending basis and is
around 30-40% of new lending each month. Instalment arrears on premium tier
business is tracking at around 0.01% compared to Tier 2 instalment arrears at
5.6%.
The introduction of comprehensive credit reporting alongside negative
reporting is proving to be a strong combination of data to help us profile
borrowers.
The Turners Cars loan origination is going well and we are earning more
margin in the group as a result of this. Turners Cars ledger is now up to
$52m and is performing exceptionally well on lending quality metrics.
We also completed the strategic review process for Oxford during the year and
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. We are pleased to have such a strong
annuity business within the group at this time and have funding and equity
capacity to continue growing this business over the next few years.
Insurance (Autosure): Revenue $44.1m -9%, Operating profit $6.2m -25%
Underlying Segment Profit $6.2m (FY19 $5.2m)
Insurance revenue declined 9% to $44.1m (FY19: $48.5m), with General Gross
Written Premium (GWP) down 7% to $36.8m as a result of market conditions and
focusing on lower risk portfolios and vehicles. FY19 segment profit for
insurance included a one-off property gain from sale of $3m.
Underlying profit increased 19% to $6.2m (FY19: 5.2m), due to continued
improvements in risk pricing and reduction in claims loss ratios resulting
from a new insurance [software] system, as well as procurement initiatives.
The combined claims loss ratio for FY20 is 62% (FY19: 64%), while the MBI
loss ratio is a 66% (FY19: 75%).
All originators are now transitioned to a new retail policy generation system
and we continue to review dealers' portfolio performance for risk pricing.
Our Reserve Bank Culture and Conduct Review work was completed with a number
of initiatives implemented ensuring we are closer to end users and understand
customer outcomes and experience in a more detailed way.
The distribution partnership announced with Heartland Bank and our respective
brands, Autosure and MARAC is now implemented and working well. We are
working on similar models of distribution with a number of other
organisations which involved deep integration of our insurance system into
their front end sales system. This is an area where we will continue to
invest in.
Credit Management (EC Credit Control): Revenue $17.9m -1%, Operating profit
$6.5m +3%
Underlying profit same as reported segment profit
Credit management revenue decreased by 1% to $17.9m (FY19: $18.2m). Reported
Operating Profit up 3% to $6.5m (FY19: $6.3m). Although debt load was down 5%
for the year to $225m, the debt collected was up 14% in FY20 to $67m driven
mostly out of improved collections from Australian SME clients and Corporate
NZ clients. Commission earned from debt collected increased 11% to $10.0m.
Our traction with customers connecting to ECCC via Xero and MYOB continues to
gather momentum with over 420 customers connected now loading debt worth over
$3m. We have been working closely with our large corporate customers to help
manage their reputational risk with debt collection work during lockdown and
we are expecting a significant increase in debt loaded from these customers
in the medium term. We have already seen a lift in debt load over the last
few weeks from SME customers.
Digital, Data and Disruption
The investment we are making in area of digital marketing and data will
continue. We have several projects underway in the area of "lead management".
This investment enables us to identify anonymous users on our website and be
more targeted in subsequent communications with them. It also allows
platforms like Facebook to match us with customers who match people already
doing business with us.
We also implemented an automated digital communications project which allows
a more strategic and targeted approach to people who are looking to buy or
sell through Turners.
We are working on two major data projects which will help us in the area of
pricing vehicles and identifying credit risk. Both these projects leverage
"off-the-shelf" cloud-based data tools, including machine-learning. The proof
of concept results are promising and we know there is a significant
opportunity in vehicle purchasing to help identify and limit our "bad buys",
as there is in the finance business with identifying and limiting our "bad
lending".
Car subscription progress has naturally been impeded by Covid-19. We are
working directly with Collaborate Corp (CL8.ASX) in Australia to get the
subscription platform set up for NZ. We have now made the decision to brand
the business under the Turners brand umbrella due to the high trust and
strong brand value and recognition attached to the Turners brand. We expect
Turners Car Subscription to be up and running in Q2.
FY21
As with many businesses there are many environmental unknowns that we will be
operating in over the next 12-24 months.
Turners has outlined five strategic themes:
1. Accelerate market share growth
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. Leverage the high trust Turners brand
Our scale offers multiple advantages, and trust will be even more important
in the new economy. Turners has just received the Readers Digest Winner of
the Most Trusted Brand in the NZ Used Car Dealer category. We plan to
continue our focus on great customer experiences and outcomes and keep
promoting and investing in helping people understand the strength in the
Turners brand.
3. Diversified business
Turners is diversified geographically and has the advantage of annuity and
activity-based revenues. These were demonstrated during lockdown and will be
proven in near to medium term performance.
4. Digital advantage
A key differentiator is the Turners digital platform with #2 most visited
auto website in the NZ (behind only TradeMe). We will continue to make
material investment in technology, data and digital marketing.
5. Balance sheet capacity supports growth
Turners are well positioned from a funding and capital perspective to take
advantage of growth opportunities into the future. The board sees this as a
strong comparative advantage.
Funding and Liquidity
Turners' funding capacity is currently $428m with $78m undrawn. 69% or $242m
of this debt relates to finance receivables within Oxford Finance. During
March BNZ increased the limit for the securitisation warehouse facility from
$200m to $250m (including capital contribution from TRA) to provide the
headroom for further growth in the finance book. The remaining 31% of debt
($108m) relates to borrowings associated with property, inventory and the
$25m Bond program.
At 31 March 2020 we boosted our cash balances by pre-emptively drawing down
on facilities to ensure sufficient liquidity through as we entered a Level 4
lockdown of uncertain duration. These precautionary drawings have now been
repaid.
Outlook and Guidance
We expect some fallout within the dealer segment as the year progresses.
Dealer numbers have been in decline for the last two years and we expect this
decline to accelerate further over the next twelve to twenty-four months. We
know this is a good time to be pushing hard for gains in retail market share.
At beginning of lockdown we modelled out three scenarios (Worst, Likely and
Best). Pleasingly we are thus far tracking above the best case. April and May
trading have been significantly better than what we expected as we moved
through alert levels faster than originally anticipated. The benefits of
laser focus on costs, rent reductions and wage subsidy have been material.
The value of having a diversified business both geographically and from a
revenue stream perspective is of huge benefit. The offset of having annuity
revenue businesses (finance and insurance) within the group are proving very
valuable in turbulent times. Also the used car industry is a relatively good
industry to be operating, given it is largely domestic focused and has
demonstrated resilience during previous downturns.
Due to the level of unprecedented uncertainty in the economy it will be
difficult to issue guidance for FY21. We will update over coming months with
progress, and plan to give guidance once the macro environment plays out more
clearly.
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:00354850 For:TRA Type:FLLYR Time:2020-06-18 09:02:50
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