Ann: Intention to Make Takeover Bid, page-75

As a patient value investor I think the TRS is worth AT LEAST 2 times the $2.70 takeover offer.

I'm willing to hold the shares for at least 5 years to get a decent price.

The share prices for many companies move in cycles, even for no growth mature companies.

TRS has been hit by a double whammy of reduced P/E and reduced EPS .

It is just dumb to sell on bad news at the low point in the cycle.

Better to buy on bad news and sell on good news.

In the last 18 months institution buying has pushed the share price from $3.25 to over $8  with FY17 eps = 40c

These same institutions selling out pushed the sale price from $8 to $2 with estimated FY19 eps= 34c

Overreaction !

1. ASSET BACKING

nta = $5.23 plus franking credits = $1.71

Why I think NTA is important for the value of TRS.

(I)  NTA gives an indication of how much a new competitor would have to spend to set up a rival network of 400 retail stores.

    Cheaper to buy the existing operator at 50% of the price.

(ii) shares selling below NTA are likely to attract the interest of Fund Managers with a value bent.

(iii) for predators or private equity or private owner reckon cash ( 51c per share ) could be siphoned off immediately.

     franking credits of $1.71 could be siphoned by a shrewd operator.

2. EARNINGS and CASHFLOW 

Based on guidance assume FY19 eps = 34c

In FY18

depreciation was $19.2M, non cash item in eps

capex was $17.4M (in investing cashflows) cash item

Capex broken into new stores=3.7, existing stores=7.5, DCdevelopment =.3 , IT development=2.4, general capex=3.5

Stop rollout off new stores gives  extra $3.7M cashflow

But IF I was a hardline Private equity  guy I would be looking to slash capex to less than 50% of FY18 rate.

Say capex FY19 =50% x 17.4 = $8.7M

FY19 Depreciation - capex = 19.2 - 8.7 = $10.5 M or 36.3c a share.

36.3c in cashflow not in eps.

FY19 eps + "hidden" cashflow = 34 + 36.3 = 70.3 c

What price to give an private owner a 15% p.a. return ?   51c ( cash ) + 6.7 x 70.3c = $5.22

Include franking credits siphoned off and the price is higher again i.e. $6 plus

3 SHORT TERM SHARE PRICE

The low ball bid at $2.70 is unlikely to succeed, what happens next for share price.

A lot depends on dividend and whether a BUYBACK policy to boost share price

Board recently reaffirmed around a 60% payout ratio.

A fully franked 20c dividend supports a share price much higher than $2.70. 

Growth in eps by BUYBACKS makes much more sense than increasing stores rollout.

The market maybe saturated with too many stores so new stores cannibalising existing stores.

See comments by Earle Sacher ( former CEO of TRS ) in recent AFR article.

Current management out of touch.