FYI | Jul 05 2006
By Chris Shaw
While companies are constantly on the lookout for ways to lift earnings and grow operations, ill-timed or poorly thought out acquisitions can easily destroy value rather than create it.
Such has been the case for New Zealand’s Turners Auctions (TUA.NZ), where previous management attempted to expand into the North American market through acquisitions in Vancouver and Seattle.
ABN Amro (Craigs), which rates the company as Buy, notes it has now sold its 50% stake in the Vancouver business, leaving only the small Seattle business as an overseas asset. The broker expects this will also be sold in due course. On its estimates the North American operations generated losses of about NZ$2.5m over the past three years, so it is a case of addition by subtraction as the company and its new management team can now focus attention on its core domestic operations.
These operations have been showing some improvement, as the broker notes the sale of the Vancouver business has not produced a change in management guidance of a FY06 result higher than was achieved in FY05. The broker is forecasting a net profit in the current year of NZ$5.28m, up from last year’s NZ$5.02m.
Risk is to the upside though, as the broker notes the result for the first quarter showed profit was up 9% on the previous corresponding period, ahead of its estimate of a 5.2% increase. This should be positive for earnings growth, which is currently expected to be modest in coming years based on forecasts of a FY07 profit of NZ$5.56m and in FY08 of NZ$5.68m.
On the broker’s numbers the stock is trading on a FY06 P/E of 9.7x, a 35% discount to the market average. Adding to the attraction at current levels is an attractive gross dividend yield, which it forecasts will be 11.8% this year and 13% in FY07.
ABN Amro has a share price target of NZ$2.51 on the stock, while Thomson One Analytics notes the median price target on the stock is NZ$2.82. This compares to a 12-month range of NZ$1.72-NZ$3.05 and a last closing price of NZ$1.87.