I don't think any "takeover price" discussion can be meaningful...

I don't think any "takeover price" discussion can be meaningful without discussing valuation.

And, in TRS's case, valuation is a function of the level to which the "new" management can restore the company's operating earnings (in this case, EBIT is considered the best proxy for operating earnings), from last year's level of, effectively, zero.

The three most obvious shareholder value restoration levels that are able to be pulled by management are:

1.   Increasing the GP Margin
2.  Shutting down loss-making stores
3.  Reducing Administration expenses


Dealing briefly with each one of these:


1. Increasing the GP Margin:

TRS's GP Margin is today around 42%, but has been as high as 48%:



Several factors are behind this deterioration, some of them structural, some cyclical and some plain poor merchandising execution.

I expect management to address the merchandising issues by reducing the number of SKU's and while I don't think that 48% GP margins are likely to recur (the bricks and mortar retail landscape is structurally different today compared to the early 2000's), an outcome where GP margins are restored to their levels of just 4 or 5 years ago (i.e., ~44%) is not difficult to envisage.

On a reduced Sales basis (assumed 10% of Sales are jettisoned - refer to discussion below on the scope for store closures), this would result in a $8m to $10m uplift to EBIT


2. Shutting Down Loss-Making Stores:

Given the margin erosion as TRS rolled out more marginal stores between 2010 and 2018, which saw EBIT per store fall from $170k per store, to $60k per store in FY2018 (and to almost zero in FY2019), it stands to reason that there will be a meaningful "tail" of stores in the TRS portfolio which are today loss-making.



Assuming, for simplicity (and, I believe, conservatively) that TRS management are able to identify around about 10% of the group's total store base that can be shut down (so ~35 stores), and that the average EBIT loss for each of those 35 stores is around $80k... crude weighted average using 5 stores losing $200k ea, 15 stores losing $100k each and 20 stores losing ~$50k each.

That would result in a further ~$3m EBIT uplift.


3. Reducing Administration Expenses:

Another financial indicator of the business having been managed without proper focus is the lack of fractionalising of fixed overheads (Administration Exenses) as the business expanded, thereby totally foregoing the usual benefits of scale.

While Revenue increase by 92% between FY2009 and FY2019, from $412m to $794m, Admin Expenses increased by 80%, from $24m (5.7% of Sales) to $42m (5.4% of Sales).   Viewed another way, Admin Expenses over that period rose at a compound annual growth rate in excess of 6%pa(!)

There is clearly a lot of fat embedded in the company's corporate cost base, and I think that at least $5m of Admin costs can be ripped out without it having any impact on the running of the business.

So I can easily envisage $5m EBIT uplift here.


So, to summarise:

Total Potential "Low-Hanging Fruit" EBIT Uplift potential from management actions = ~$18m
[$10m (Improved GP Margin) + $3m (Closure of Loss-Making Stores) +$5m (Reduced Admin Expenses)]


Taking EBIT from zero to $18m would, at the current EV of $105m  (after today's share price rise), value the company at a little over 5x EBIT (or 14% After-Tax FCF yield)

Which, to my mind, is still significantly too cheap.

At $6.00/share - one of the takeover numbers bandied about - the EV/EBIT becomes 8.0x (corresponding After-Tax FCF Yield of 9%), which I believe looks about the right takeover number in terms incorporating a change-of-control premium.

But if management in coming months articulate a clear and credible strategic pathway to going from EBIT breakeven to a figure close to my $18m figure, then that would make a successful $4.50 takeover bid nigh on impossible.


PS.  It warrants reminding that EBIT of $18m is not in the least out of kilter with the precedent earnings capacity of the business: