NTD (ASX) Ann: FY20 Investor Presentation

Originally posted by hankreardon: ↑

You are asking questions for which the answers are almost certainly unknowable. Why not focus on the knowables instead.

My take on the "knowables" is:
1. April/Mar was almost certainly a bottom of sorts
2. The global tyre industry has had a significant contraction in both margins (since at least 2017) and had a significant revenue drop in H219.
3. Tyres are going to be structurally a relatively low growth industry overall, as it is quite mature, although segments will outperform at various times.

Now onto NTD specifically.
4. NTDs numbers in this period appear to be superior on both top and bottom line than overseas comparables- why? I think it is more likely to be related to the domestic economy and the segments they operate in rather than anything business specific per se. My conjecture/guess on this is that there are two likely possibilities- the excess fiscal stimulus from early superannuation withdrawal (which is Australia specific) +/- exposure to Chinese commodities demand backflowing through to parts of the Australian economy, as these seem to be two factors relatively specific to Australia compared to the rest of the world.
5. The trading updates provide very useful information to track what is happening right now. Predicting short term outcomes is particularly useful for "cyclical" businesses.* Specifically, predicting near term cashflows is far easier than predicting long term outcomes (ample data published supporting this). If the payback period is particularly short, this significantly derisks the business. Moreover, if the payback period is particularly short, it is usually the bottom of the valuation cycle- as more astute investors are willing to take on risk when they know that the chance of losing their money is close to nothing.

Now the 30 June update had cash of 20.8 and net cash of 8.5 as compared to 25 and 13.6m in the reports above. Assuming the accounts weren't available at 30 June- I am guessing that the increase in net cash is due to inventory run-down + receipt of jobkeeper funds. Assuming 100% of jobkeeper funds were receipted in June (~1m), 4.1m of inventory run-down translates into an FCF (ex-tax) of ~1m assuming a gross margin of 25% on inventory carried at cost on the balance sheet. This corresponds nicely to the ~1m EBITDA upgrade in that time as well. It is very likely that T4U had similar tailwinds (as just about every other sector of the economy outside of metropolitan Melbourne). I am going to go out on a limb and make the hazardous assumption that T4U is likely to remain profitable given an overall improving economy, and assume net margins of approx 2% on the c250m of additional revenue provided (I think it could actually be closer to 300m but I'm trying to be conservative) for year 1, and then a more normal margin of 3% thereafter. On these pretty conservative assumptions, the IRR of the acquisition is ~20%.

There remains enormous upside, that is not captured. Quite patently, if the Australian economy recovers sooner than other economies, the acquisition will pay for itself much sooner and any short-lived increased demand for tyres would also pay itself off much sooner. A combination of rising revenues and expanding margins is very favourable for payback period. There would appear to be very low hanging fruit in expanding internationally with a very low cost of debt under those circumstances (eg. I wonder what the remaining 50% of the South African business is going for right now...?). The September update will be very interesting.

*I personally think most dynamic systems run in cycles, just that some cycles are much longer than others.

Expand

I have given up trying to do any meaningful analysis because there are many external factors that affect the biz and I'm not smart enough to predict how each will play out:

1) Tyre raw materials are tied to oil price and big manufacturers like Coops can pass on price increases basically when they want, but are less willing to share any benefits from price declines
2) FX is very important
3) Regulations - AU has been a dumping ground for cheap Asian tyres as a direct result of US tariffs
4) Competitive environment - the big players can choose to buy market shares and squeeze out the smaller ones - NTD is a price-taker in this regard, so GPM is not something they can actively control
5) Demand and consumer preference

Which leaves one remaining lever that management can control - cost. And management are good at it and have done a good job so far with NTD. Now they get to have a play with T4U. I'm excited to see how well they go with it.

No.	Vol.	Price($)
1	764	41.0¢

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764

41.0¢

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43.0¢	36792	2

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43.0¢

36792

No.	Vol.	Price($)
1	764	0.410
3	25498	0.400
1	25000	0.385
4	64631	0.380
2	29732	0.370

No.

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Price($)

764

0.410

25498

0.400

25000

0.385

64631

0.380

29732

0.370

Price($)	Vol.	No.
0.430	36792	2
0.450	15000	1
0.455	45210	1
0.460	16000	1
0.470	21537	1

Price($)

Vol.

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0.430

36792

0.450

15000

0.455

45210

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21537

(20min delay)
Last 42.5¢		Change -0.005(1.16%)		Mkt cap ! $57.00M

Open	High	Low	Value	Volume
43.0¢	43.0¢	41.0¢	$7.687K	18.36K

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