Ann: Chief Executive Officer Appointment - Andre Reich, page-13

While the stock is 50% higher than it was just a few months ago, in some ways I think it actually offers a better investment proposition today, given that the catalysts for a restoration in lost shareholder value have now been put in place.

And the most important precursors to those catalysts have occurred, namely the appointment over the past 12 months of three new directors to the Audit and Risk Committee, and - in the past few months - a new CEO and chairman, as well.

This means that, while the departed CEO and directors had no mandate to take the necessary steps to turn the business around (because doing so would require going in the exact reverse direction of the wrong course that those departed executives had been taking the business for the past 5 years), the next management team have full carte blanche to do what is required to improve profitability and returns on capital.

So while I think that the investment thesis (posted more than a year ago, see below) is still perfectly valid, its commencement has been delayed by a full 12 months due to the time that was required to see to the departure of the former CEO and chairman and the appointment of their replacements:

https://hotcopper.com.au/posts/36488859/single



The essence of TRS's valuation appeal is the significant latent value that exists in an $800m pa turnover business, which has been afforded an Enterprise Value of just $80m.

The reason for that austere treatment of the valuation by the market is because currently, no margin is being earned on that $800m of annual sales.

In the past , as much as 7% of Sales converted into EBIT, with a long-term average of around 3% or 4%:




Heck, even if the new management team can get the EBIT margin to just 2% [*], that will translate into $16mpa of EBIT (and around $30m in EBITDA).

Valuation-wise, that would be  equivalent to an EV/EBIT multiple of 4.5x (EV/EBITDA of around 2.5x) and a Free Cash Flow Yield of somewhere between 15% and 20%, depending on how much catch-up spend is required to refresh the store offering over the next two years.

Of TRS's 357 stores, I'll wager there is a meaningful tail of them - at least 20 or 30 of them - that are either making losses or are breaking even, and probably a further 40 or 50 of them that are not generating financial returns in excess of their cost of capital.

Terminating these loss-making and under-performing stores is the quickest path to restoring the earnings base of the company to more representative levels.

Problem to date has been that the previous management team and board were the ones that allocated the capital that is tied up in those 60 or 80 under-performing stores, so they couldn't order to terminate them without it being a de facto admission of having stuffed up.

But the new directors and CEO carry no such legacy baggage and have every licence to chop off the "toxic tail" of stores which are acting as the drag on the group's P&L.

Pleasingly, they are already making the right noises to this end.... from the announcement published at the time of the AGM in October:



"Your Company will take a more aggressive approach to occupancy costs" .... another way of saying:

"From now on we are going to actually do the job for which we are being paid."


[*] Some financial engineering is already providing management with a bit of a tailwind to get there: by booking $23m in writedowns and impairments to Property Plant and Equipment (which contributed to the carrying value of PP&E being reduced to $61m @ 30 June 2019, from $92.5m @30 June 2018).
That 35% reduction in the depreciate-able asset base will result in a similar order of magnitude reduction in the ongoing depreciation charge reflected in future P&L's.
For context, depreciation in FY2018 was $19.6m; all other things being held equal (see comment below relating to AASB 16), the lower depreciation charge implies a $5m to $6m potential lift to EBIT going forward.  

Of course, that all excludes the impact of first-time adoption this year of Accounting Standard AASB 16 (to do with the bringing of lease liabilities on-balance sheet) which will result in the accounting for lease payments below the EBITDA line where, before AASB 16, this was reflected above the EBITDA line).  

And none of the above accounting oddities will impact the cash flows of the business; they are purely that: "accounting oddities", but to the extent that they have bearing on TRS's financial cosmetics (which, for some reason, are of investing interest to a great many market participants), they are worth noting.
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