Expanding Retail Network And My Auto Shop Acquisition To Boost Future Prospects

Key Takeaways

• Growth in premium lending and finance originations targets high-quality customers, improving net interest margins and driving finance revenue growth.
  
• Retail and acquisition strategies are expanding market share and cross-selling opportunities, enhancing future revenue in auto, finance, and services segments.
  
• Revenue growth faces challenges from reduced vehicle margins, supply constraints, and economic pressures on consumer spending and credit growth, impacting financial performance.

Catalysts

Engages in the automotive retail business in New Zealand and Australia.

• Turners is experiencing growth in premium lending volumes and finance originations, particularly targeting high-quality, low-risk customers, which is expected to improve net interest margins and drive revenue growth in the finance segment.
  
• The easing of interest rates is anticipated to positively impact the finance business's net interest margins, reversing prior headwinds and boosting earnings growth as nearly 38% of debt is floating and will benefit from lower rates.
  
• Turners is expanding its retail footprint with new branch developments in key locations (Tauranga, Christchurch, Napier), which is likely to increase market share and drive future revenue and earnings growth in the auto and finance segments.
  
• The acquisition and scaling of My Auto Shop is expected to leverage Turners’ existing network and customer base for increased cross-selling opportunities, providing potential future revenue growth in the automotive services market.
  
• Turners is strategically acquiring lower value but higher demand used vehicles and improving profit margins in this segment, which should stabilize and potentially increase future auto retail revenue and net margins as market conditions improve.

Turners Automotive Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Turners Automotive Group's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 9.2% in 3 years time.
• Analysts expect earnings to reach NZ$47.7 million (and earnings per share of NZ$0.53) by about February 2028, up from NZ$33.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2028 earnings, down from 15.9x today. This future PE is greater than the current PE for the NZ Specialty Retail industry at 15.2x.
• Analysts expect the number of shares outstanding to grow by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.81%, as per the Simply Wall St company report.

Turners Automotive Group Future Earnings Per Share Growth

Risks

• The drop in revenue from auto retail due to lower-priced cars and decreasing vehicle margins could pressure overall revenue growth if the auto segment does not recover quickly.
  
• Reduced inventory levels in the auto segment, partly due to supply constraints, may impact the company's ability to meet demand and therefore affect sales revenue.
  
• The economic pressure on household indebtedness, particularly in regions like Auckland and Wellington, could reduce consumer spending on vehicles, impacting future revenue.
  
• Credit growth may be slower than projected, with a cautious growth outlook for finance receivables, which may affect net interest revenue and overall earnings from the finance segment.
  
• The expected continued economic challenges, such as high unemployment and consumer affordability issues, could impact arrears levels and bad debt, putting pressure on net margins and financial performance.

Valuation

• The analysts have a consensus price target of NZ$6.151 for Turners Automotive Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$6.95, and the most bearish reporting a price target of just NZ$5.35.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$518.1 million, earnings will come to NZ$47.7 million, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of NZ$6.02, the analyst price target of NZ$6.15 is 2.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.