Chiefs cash in on Turners car options

By JENNY RUTH


Since it listed in late 2002, Turners Auctions has hardly put a foot wrong, beating its prospectus forecasts, chalking up five years on the trot of record profits and promising more of the same.

The company did scare the horses a bit in February when it announced a 5 per cent drop in net profit for the six months ended December to $2.8 million, caused by $766,000 in losses from its Canadian venture, but the share price recovered within a couple of months.

However, the share price has been declining steadily since late June, with the pace of decline accelerating since the middle of this month. The shares have dropped 17 per cent from $5.30 to $4.40 yesterday when they were being bid lower.

It just so happens that the company's top three executives, chief executive Jeff Wesley, chief financial officer Tony Coombe and chief operating officer Stuart Clark, all exercised a swag of options - granted them in the float - this October 13 and promptly sold all but a handful on October 15.

Wesley exercised all his options at $1.50 a share, or $504,000, and sold all the resulting shares for $4.40 a share, or $1.48 million. Clark exercised his 224,000 options at the same price, or $336,000, and sold the shares for $985,600. Clark already held 9734 shares which he has not sold. Coombe exercised 184,000 of his options for $276,000 and sold the shares for $809,600. Coombe already had 10,470 shares, which he did not sell and he has kept 40,000 options.

The three executives couldn't exercise their options until two years after the float, but had until August 2007 to buy the shares. Their early exercise and sale doesn't look like a vote of confidence in the company.

If you really believed the company was going to continue to perform, you would expect the shares to be worth more next year and the year after. But the executives have opted for the bird in hand.

Wesley says the sales "should tell you the system is working". The options were designed as golden handcuffs for the senior executives and they were all still with the company. "My family have various investments in the company so I guess I tend to look at that."

The last annual report shows the 336,000 options just exercised and his salary as Wesley's only interest in the company.

He did not think there were flaws in the options scheme, although the executives did have to pay up to exercise them.

Wesley didn't say so, but Fisher Funds Management, the company's largest institutional shareholder and second largest overall with 18.9 per cent, thinks the executives' actions were because of tax implications. Carmel Fisher points to the example of former Wrightson managing director Alan Freeth who sold Wrightson shares last year.

Fisher said she was concerned about the signals the sales sent, but after speaking to them she believed the executives were still committed to the company.

Although substantial shareholder notices suggest Fisher Funds Management had been selling earlier in the year, Fisher said one of the notices was incorrect. In fact, her company has only ever been on the buy side of Turners Auctions.

Fisher says the share price decline lately may simply reflect the growing talk about the share market nearing the end of its bull run with the economy facing a slowdown. "The amber light is flashing."

Wesley suggests declining car registrations, rising oil prices and rising interest rates as other contributing factors. Also, more countries are accepting Japanese-used cars, which account for about 95 per cent of New Zealand's used car imports. The high kiwi dollar has so far cushioned the impact of this growing competition.

Nevertheless, the company's latest results don't indicate huge reasons for concern. It reported a record $3.6 million net profit, up 12.8 per cent on the six months last year.

Investors should have been reassured that the Canadian losses were stemmed. In August, when the company reported its results for the six months to June 30, it said its joint venture in Canada contributed a $6000 profit for the six months. The overall results for Canada were still negative to the tune of $721,000 as a result of the costs of closing its original Richmond site in Vancouver.

After a reorganisation, Turners owns 50 per cent of the joint venture, but also owns preference shares entitling it to receive the first profits until the preference shares are redeemed. It had previously owned 84 per cent.

Given the joint venture's small profit, it seems the losses are now behind the company, although the joint venture also owns 50 per cent of Seattle-based Ehli Auctions, which contributed an equity-accounted $9000 loss to the latest results.

Wesley talks about expanding to Oregon and northern California within the next one or two years.

"I would like to have somewhere between five and six operations in North America, but the speed will be entirely determined by the profits coming out of the ones we've already got," he says.

The company is getting 12,000 to 15,000 people coming to auctions on Saturdays in Seattle compared with about 150 at a typical auction at its Penrose car auction site, and between 300 and 400 for general auctions in New Zealand.

But he's resigned to investors remaining sceptical "until we actually publish the hard numbers in the second half. A lot of people don't believe things until they see them in black and white."

In any case, one of the few analysts to follow the company, Selwyn Blinkhorne of ABN Amro Craigs, says whether the company succeeds or fails in Canada is a bit beside the point.

It isn't risking a great deal of money in Canada, although he questions whether it will be able to get a decent return on the capital it is spending there. The key to Turners' future, in Blinkhorne's view, is whether it can successfully establish its car finance arm.

The company decided last year to start providing car finance, and launched in March this year with Motor Trade Finance providing back-office support. The company aims for a finance book of between $8 million and $10 million by the end of the year and to more than double it next year.

The company looks on track to achieve this year's target.

Chairman Michael Dossor told the last annual meeting in mid-April that the company's finance book was already in excess of $250,000 "without any real efforts to market this offering at this stage". (Dossor represents the company's largest shareholder, Bartel, which is owned by the Alvaro Noboa family of Ecuador who export the Bonita brand of bananas. Bartel has 21.9 per cent, gained through its original investment in Turners former parent, Turners & Growers).

In August, Turners reported its finance book had grown to $2.1 million at June 30.

Blinkhorne says that, on average, about 50 per cent of car buyers take out finance and that if Turners achieves its goal this year, it will only provide finance to 5 per cent of its retail buyers.

"If they can get anywhere near 50 per cent they will be making some serious money," he says.

Wesley is confident the finance operation will meet its targets and is already thinking about what will happen then.

"The biggest problem finance companies have is (loan) origination, and we've got the numbers every day," he says.

"If we need $25 million or $30 million, if the numbers stack up, we will go and raise the money. It's a big maybe at the moment."

Another key to Turners' future will be its plan to introduce its own certified used cars, similar to Toyota's Signature Class.

Turners will check each vehicle before certifying them and providing warranties.


Turners Auctions

Managing director: Jeff Wesley.

Latest results: net profit $3.6 million for the six months ended June 30 v $3.2 million previously.

Market capitalisation: $120.2 million.

Specialist car auctioneer Turners Auctions was spun out of Turners & Growers in late 2002 and is New Zealand's largest car auctioneer. It expanded into Canada last year and started a finance company early this year.