|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||44||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
Mkt Cap: NZ$ 44.35m (USD$29.2m)
Turners Auctions (TUA) is a cheap
Turners Auctions is the leading used auto auctioneer and the largest single seller of motor vehicles in
Turner’s seller base is 50% dealers (dealers selling used cars that were traded in or imported), 15% private (individuals selling to individuals), 30% corporate (sales of rental and other corporate car fleets) with the remainder from government and Turners own imported fleet of used cars. The buyer base consists of about 50% dealers (planning to resell cars to buyers from their lots), and 45% private (individuals).
The used car auction business generates high cash flow and requires minimal capital investment. TUA leases the property where auctions are held and the only inventory on its books is from its fleet import business (only 6% of total sales). The majority of profit comes from commissions on sales which average about NZ$271 per car.
As an auction company, Turners acts as the transaction broker and, unlike dealers, does not invest capital in inventory. With a declining NZ dollar, dealers are finding it increasingly expensive to import cars while sales prices remain flat to down. TUA’s fleet business only accounts for 6% of its total car sales, and carries a month and a half worth of inventory. In this tough market TUA has the flexibility to scale back its fleet business and isn’t forced to take on inventory risk. When dealers import and sell fewer cars TUA’s total commissions are impacted, however TUA continues to make a commission based on just the sale price of each car sold.
TUA is still paying an 8.3% dividend yield and has a FCF yield of 14% in this difficult market. The variable cost and low asset model allows TUA to adjust to the temporary downturn in volume sales. As the 800 pound gorilla in the space (with 80% auction sales market share) TUA still is best position to survive the downturn.
On average approximately 50% of cars purchased from dealers in
At its 2004 peak, TUA produced free cash flow of NZ$7.8m, 28% higher than current free cash flow, with an ROE of 32%. And that was with no finance business. TUA will return to this level in the next 2-3 years with little additional capital investment and a minimal increase in operating costs as the economy recovers. An economic recovery, increased used car auction volume arising from population growth, and growth of the Turners Finance business will allow TUA’s cash flow to surpass its previous peak.
Turners recently sold its unprofitable
Turners is a similar business to Adesa (KAR) posted on VIC a month ago, only TUA is the dominant market player (80% vs.18% market share), has net cash on the balance sheet versus KAR’s net debt, and is trading significantly cheaper. KAR was trading at 7.8x 2008 estimates EBITDA – capex while TUA is trading at 4.2x LTM EBITDA – capex, or 3.5x peak EBITDA – capex. When looking at TUA’s EV, it is necessary to break out the finance ledger from the operating business. TUA had NZ$6.6m of discretionary cash and no long term debt on the balance sheet after separating the finance business, making the EV NZ$37.7m.
For example, growth of the lending conversion rate from 5% to 10% (already increased to 5.6% in 1H 06) will provide additional $0.56m pre tax earnings a year. This would increase current earnings before tax 7% with no change in the core auction business.
Management has a solid command of the business and is acting in shareholder’s interest, as evidenced by closing the North American operations and maintaining the dividend through the cycle. The three largest holders control just over 50% of the shares outstanding. Guinness Peat Group, with a 20% stake, is an activist investor and will work hard to realize value from the investment over time. None of the large holders has a strategic interest in the business.