Turners profits up 24%

Turners Automotive Group has delivered strong earnings growth despite Covid-19 lockdowns disrupting operations.

The company says its results for the past half-year demonstrate the improvement made in the business over the past few years. 

“Geographic and earnings diversification” have underpinned a 24 per cent increase in net profit before tax (NPBT), and these “have contributed to a strong and sustainable yield”.

“The start to our 2022 financial year could not have been any better,” says Todd Hunter, chief executive officer.

“Our plans were well-executed and we experienced significant uplift in results up until August with record months for operating profit. 

“We had serious momentum, which was obviously curtailed with the Covid-19 lockdowns. However, we’ve seen results steadily improve from the second half of August through to October. This gives us confidence that, with further easing of restrictions, we will see our business perform similar to pre-lockdowns. 

“Despite these current disruptions, our conviction levels are very high to exceed our target of $45m of NPBT in financial year 2024.”

Financial results

Reported NPBT, which is the basis for Turner Automotive Group’s full-year guidance, increased by 24 per cent to $23.2m. Net profit after tax (NPAT) was $16.9m – up by 26 per cent on the same period last year. Normalised NPBT jumped by 55 per cent to $24.5m.

Earnings per share for the 2022 half-year were 19.6 cents, up 25 per cent on the previous year. The board has declared a first-quarter dividend of 5c in October and a further 5c for quarter two. This reflects dividend policy to pay out 60-70 per cent of net profit after tax (NPAT) and represents a 25 per cent uplift on the same time last year.

Grant Baker, chairman, says: “We’re really pleased with the first-half results, and that we continue… to deliver strong and sustainable improvements. 

“Our strategy is working. We are growing our profits, delivering improved dividends to shareholders and growing a property portfolio. 

“It is interesting to see investors sitting up and taking notice of businesses operating in the used-car market. It has reaffirmed what a great business Turners Automotive Group is and how undervalued it is.

“Yet again, our geographic diversification and earnings diversification has come to the fore. We’ve stuck to our investment plans and our competitive advantage is only increasing, which gives us confidence about our ability to keep growing. 

“Obviously, market conditions remain somewhat uncertain, but as restrictions continue to ease we expect our business to perform better than before.”

Automotive retail

Revenue grew by 20 per cent to $115.1m, reflecting the lift in market share and margins in the first quarter, while segment profits climbed by 32 per cent to $10.2m.

Continued focus on “sourcing smarter has been working well”, while the “Tina” brand campaign has helped to build buyers and sellers. 

“Investment in additional training and support resource in the finance and insurance space has delivered a significant improvement in finance conversion rates, which have improved to 36 per cent in the first half of FY22 compared to 29 per cent in first half of FY21.”

Late in quarter two, Turners secured a large supply contract of about 3,500 additional units per annum with Fleet Partners NZ, which has opted to close its AutoSelect retail yards and transition this supply to Turners Cars. 

This is a material lift in additional consignment units for the automotive retail division, which continues to benefit from a diverse geographic footprint as demonstrated during the recent regional level-three lockdowns. 

With a solid plan of new branches coming on-stream, Turners expects to see further market-share gains over the next two to three years.

Finance

The group’s finance division had “another outstanding six months” with loan-book growth of 24 per cent over the 12 months to September 30. 

Revenue for the half-year was $25.2m, up by nine per cent on last year. NPBT was $9.9m for an increase of 30 per cent on the year prior, “benefitting from continued improvement in loan-book quality”.

Lending was impacted during August and September – $21m per month compared to an average of $27m per month for April through July, including a new monthly lending record of $32m in July. 

“Hardships increased as expected during recent lockdowns, but peaked at levels of less than one-third of hardships approved during the 2020 lockdowns. We expect most of these customers to rehabilitate back to full payments within six months.

“We have maintained the Covid-19 buffer in arrears provisioning [$1.4m] to allow for any unexpected degradation in impairment losses in future months.

“Arrears continue to improve as expected due to the structural improvements in the quality of the loan book. 

“Consumer arrears are at historic low levels of 2.7 per cent [six per cent in H1 FY21] and commercial arrears are at 1.2 per cent [3.9 per cent H1 FY21]. Based on current trends, we expect arrears to track down to two per cent over the next year.”

Insurance

Gains in market share drove strong policy sales in the first quarter, but sales were impacted during the second quarter’s lockdown period meaning revenue decreased by two per cent to $20.8m. 

However, NPBT jumped by 28 per cent to $5.8m on higher margins, reducing overhead costs and less claims due to less motor-vehicle movements in lockdown.

Claims costs were 13 per cent down on the first half of the 2021 financial year, but emerging signs of parts price inflation and labour-rate increases will require adjustments to policy pricing over coming months. AM Best reaffirmed its financial strength rating to B++, which is “good”.

“We have continued to make good progress with distribution agreements, and have added MTF as another system-integrated partner for reselling Autosure products. Further opportunities are being actively worked on.”

Credit management

Revenue decreased by 19 per cent to $5.7m with the impact of Covid-19 again visible in collections results. Segment profit dropped by 31 per cent to $2.1m.

Debt load went up nine per cent for 2022’s half-year to $61m as New Zealand corporate customers, in particular, get back to the business of collecting. 

Overall debt collected is in-line with the prior year despite the higher debt load due to restrictions imposed by large customers on collecting from debtors in level-three regions.

There is an increasing level of commentary about business debt defaults increasing with credit bureau Centrix reporting Auckland business debt defaults being up by 18 per cent this year compared to 2019 in pre-Covid times. 

“This combined with the levels of debt being loaded gives us confidence we are moving into an environment where bad debts are likely to increase and collection services will see increasing demand.

“Our transition to a digital-based business is continuing as well as transforming our collections approach to be more focused on resolution rather than consequence.”

Outlook and guidance

“We saw another step change in the financial year 2022 results from April through to July,” says Hunter. “Our momentum naturally stopped in mid-August due to the nationwide lockdown, and extended regional lockdowns in Auckland, Waikato and Northland.

“We did expect trading results to improve over coming months in-line with the easing of restrictions and, pleasingly, October has already shown strong signs of early recovery. A similar trend has continued into November. 

“October tracked ahead of October 2020, a period when Auckland was in level two for only seven days before joining the rest of New Zealand at level one.”

In automotive retail, the number of vehicles sold in October was ahead of the same month of last year, while new lending was materially ahead with arrears at historic lows.

New insurance policy sales for October were ahead of levels in the same month of 2020 with claims below expectations, and debt load is “recovering but collections actions still impacted in lockdown regions”.

Turners’ NPBT guidance for the 2021/22 financial year is $40m-$42m. This is based on the “particularly strong” first quarter, stronger trading following the level-four lockdown, and assuming level three and two restrictions ease over the coming months.

“On that basis and with our dividend pay-out policy of 60-70 per cent of NPAT, we anticipate full-year fully imputed dividends of a minimum of 22 cents per share.

“We continue to develop our competitive moat through this time, which is positioning us for an even stronger performance in financial years 2023 and 2024. 

“Our conviction levels for exceeding our medium-term term target for FY24 of $45m NPBT target are very high. We will revisit our FY24 target at year-end.”

Divisional overview

Turners says its commitment and multi-year investment into expanding its digital strategy continues to build its competitive advantage and deliver bottom-line results in normal and extraordinary operating conditions. 

Meanwhile, disruption caused by coronavirus lockdowns “is putting significant pressure on fringe and sub-scale operators in all markets we operate in”.

“Our auto retail strategy of sourcing well, building quality digital and physical networks to deliver great customer outcomes is working very well,” says Hunter. “Our continued investment in digital and physical assets is widening our competitive moat further.

“In finance, our focus on quality lending and a quality experience for our loan introducers is our recipe for further growth. We are well-prepared for upcoming changes in consumer lending regulation and what will be a changing interest-rate environment.

“In insurance, we continue taking a disciplined approach to claims management process and associated costs, and ensuring policy pricing is regularly reviewed.

“System level integration remains a critical part of the distribution and market-share growth strategy.

“In credit management, we know the debt load is going to build further. We are ensuring processes are scalable, and the focus on repositioning the business and our processes to be more customer-focused in our collection practices.

“Even through the lockdown period, we have continued to develop and widen our competitive moat. This positions us for an even stronger acceleration of performance over coming years in the post-Covid environment.”