Fighting back against Covid-19
Turners Automotive Group has delivered “robust earnings” for the 2020/21 half-year despite the disruption caused by Covid-19.
Reported NPBT – the basis for its full-year guidance – jumped by 26 per cent to $18.7 million with net profit after tax (NPAT) of $13.4m up 25 per cent on the same period of the previous year.
Underlying NPBT was down 11 per cent to $13.1m, while earnings per share for the period were 15.7 cents, up 27 per cent on 2019/20.
The company says the used-car market has rebounded strongly in the coronavirus pandemic’s wake, and its diversified annuity businesses in finance and insurance contributed to strong and sustainable yield.
Todd Hunter, pictured, chief executive officer, says: “Given the tumultuous start to the year with a level-four lockdown, we are delighted with how our team responded to improve our ability to operate in pandemic conditions, as well as improving resilience to sustain strong yields.
“Our diversified business and quality of our trusted brands enabled us to accelerate our strategic plan to lead in the digital space and strengthen our national position in auto retail.”
Chairman Grant Baker adds: “It is pleasing to see the benefits from our strategy of a diversified business showing results, and our focus on building a quality business for our team, customers and shareholders.
“Despite some real challenges this year, we have not only built further resilience, but made progress with plans to strengthen in our key markets in the long term as well as reducing cost and improving our systems and operations.
“Obviously, market conditions remain uncertain as the pandemic continues around the world, but this necessity to stress test our business has not been without reward.”
Automotive retail
Results: Revenue $96.1m, down by 17 per cent; NPBT $7.8m, up by six per cent.
The revenue drop in Turners’ automotive retail division revenue reflects “suppressed activity during lockdown, but also a strong rebound”.
A focus for the half-year was on Covid-19 recovery and cost management. Volumes have recovered since, but the main driver of improving profitability since lockdown has been margins. Margin expansion is due to buying initiatives and tight supply of cars nationally, due to the supply constraints in “new” cars.
While there was a substantial disruption early in the half, the used-car market has demonstrated resilience, not just rebounding after lockdowns but through the economic cycle as customers consider lower cost options. The company continues to benefit from a diverse geographic footprint.
Finance division
Results: Revenue $23.2m, up two per cent; NPBT $7.6m, up 18 per cent.
Annuity earnings helped during lockdown and finance sales showed a solid rebound afterwards. Oxford benefitted from higher margins, lower accruals and greater cost-efficiencies.
Fewer than 70 customers – or 0.29 per cent – “are currently in hardship status”. The division’s focus on high-quality borrowers has seen record low levels of arrears reflecting the risk-pricing strategy over recent years, “and the business is well-placed for the second half of the year to continue its expansion”.
Oxford has built a buffer in arrears provisioning to allow for any unemployment increase in future months.
During the reporting period, premium-risk tier lending increased to more than 50 per cent. Finance continues to be a strong performer in the group – its profit contribution over recent years has grown from 24 per cent in the first half of the 2020 fiscal year to 33 per cent bow.
Insurance
Results: Revenue $21.1m, down five per cent; NPBT $4.5m, up by 74 per cent.
Insurance revenue has been impacted by lockdowns, but NPBT has increased on higher margins, the reduction of overhead costs and the end of amortising the acquired premium portfolio as part of Autosure’s acquisition from Vero in 2017.
The division contributed to the overall result and cashflow via annuity earnings during lockdown, with premiums taken up-front. Progress was made on building out distribution, and continued investment in digital and system integration.
As with finance, Turners’ insurance division continues to focus on quality as was evidenced with combined claims ratios improving from 69 per cent in the first half of 2019/20 to 59 per cent in 2021’s first half, and AM Best upgrading its credit rating and financial strength rating for insurance.
Credit management
Results: Revenue $7m, down by 29 per cent; NPBT $3m, down by 17 per cent.
The impact of Covid-19 was visible in market-wide conservatism with respect to debt collection actions during the first phase of the pandemic.
The division remains an important part of Turners’ diversification strategy, offering a hedge for any potential cyclical downturn ahead. It has been successful in managing cost in a reduced debt-load environment and maintains strong relationships with debt lenders.
Bosses expect to load more debt over coming months following a hiatus period during and post lockdown, during which lenders prioritised managing reputation over collections. A similar pattern was experienced post-GFC before a busy collection period began.
Digital strategy
The expansion of Turners’ digital strategy over several years “is bearing fruit and contributed greatly during the period under review”.
This was accelerated as part of the coronavirus response when no or low-contact transactions and customer service was required. Covid-19 added impetus to momentum to move to digital platforms and lower cost, easy to use and self-provisioning models for customers.
Turners sees an opportunity to achieve market leadership in digital across all business sectors to further increase resilience, lower costs and improve customer experience.
Ooutlook and guidance
Although the strong market rebound post-lockdowns has been pleasing, Turners remains focused on agility and managing uncertainty as Covid-19 pandemic remains rife throughout the world.
For every month since June, group operating profit has been well above levels in the 2020 financial and reductions to the fixed cost base will deliver ongoing benefits over the years to come.
As for the third quarter of 2020/21, key themes for the company have continued.
These include continued supply constraints and better-than-expected demand contributing to margin improvement on owned inventory in automatic retail.
Strong new lending with arrears at historic lows are anticipated in finance, and strong sales of new insurance policies with claims ratios improving in insurance. As for credit management, debt loads are expected to increase as corporate clients reinitiate collections.
Turners’ board expects to achieve toward the upper end of its 2021 fiscal year NPBT guidance of $28m to $31m, assuming there are no significant further Covid-19 lockdowns in New Zealand.
At the mid-point of the guidance range, this could yield a full year dividend of 17 cents per share.
