# NTD - National Tyre & Wheel



## System (28 November 2017)

National Tyre & Wheel Limited is a tyre and wheel wholesale business which distributes its products to over 2,300 customers including tyre retailers, car dealers, mechanical repair businesses and automobile accessories retailers throughout Australia and New Zealand. By the Listing Date, National Tyre & Wheel will also have operations in South Africa.

It is anticipated that NTD will list on the ASX during December 2017.

http://www.ntaw.com.au


----------



## Huskar (21 May 2019)

This a fallen IPO, a category which is interesting because it suggests that the company was dressed up for the IPO and the sheen has come off, but there is likely to be a good business under the muck because that was the reason it could list in the first place... However, here not as compelling because rather than a PE-sell down it was a capital raise for new acquisition / expansions. 

Getting squeezed by currency and by price rises from large supplier. I don't hold but one to look into further and given large price falls an interesting one to have on the radar. What do others think?


----------



## Jackass (17 August 2020)

Yep I hold this. Got in a little while ago during the covid panic selldown. The case for this one is fairly easy to understand - selling tyres in a country like Australia, NZ, and South Africa with poor public transport networks, poor rail freight networks and large distances to cover. Got them Cum div on a yield better than the the cost of capital and they were trading below book so took a punt. Then they go and take over a competitor at the right price and the share price takes off. So watching this one with interest.


----------



## finicky (17 August 2020)

Looks good for a dividend buy during a general market downer. Low risk 25c buy during Covid crisis in hindsight. 
T4U acquisition at net asset value looks good opportunistic buy - though non hostile as merger has been discussed as complementary by both managements for a while before crisis.


----------



## Jackass (18 August 2020)

Ah hindsight - the only indicator I know of with a 100% accuracy strike rate. I can only wish that I had been good enough to catch the exact bottom. My entry was closer to 35c and was on the way down. Caused me to spend a bit of time looking at these and was happy with what I saw so held on. Have sold off a few on the recent price rise though. Not sure how safe that dividend yield is going to be in the near term as they will probably have to concentrate on paying down the debt used in the recent T4U buy. Still they look a good long term prospect so happy to hold.


----------



## galumay (18 August 2020)

Interesting little business, I had a look at this week. I like the fact that its a very simple to understand business in a pretty unloved and unwatched sector. I also like the tight registry and the skin in the game from Mr Smith. 

Interestingly I might have bought if I had researched it prior to the acquisition, but the debt is now a killer for me. I will keep an eye on it though, if they can execute and pay down the debt quickly I may have another look - although given they have done it once I would be wary of future expansion of the debt.


----------



## Klogg (18 August 2020)

galumay said:


> Interesting little business, I had a look at this week. I like the fact that its a very simple to understand business in a pretty unloved and unwatched sector. I also like the tight registry and the skin in the game from Mr Smith.
> 
> Interestingly I might have bought if I had researched it prior to the acquisition, but the debt is now a killer for me. I will keep an eye on it though, if they can execute and pay down the debt quickly I may have another look - although given they have done it once I would be wary of future expansion of the debt.




The debt isn't much of a concern, as it's backed by even more inventory that they purchased. Sure, inventory obsolescence is a risk, but one with minimal probability given they effectively bought out a business they understand thoroughly.

This is really a crappy business with excellent management. They're price takers, hold big amounts of inventory and subject to FX risk. But management execute very well, with so little fat in the business.

It's worth noting that the T4U business was very likely a forced sale. You'll note they sold in April, with the contract stating things were effective as of end of April even while conditions were not met. In the meantime, demand has basically gone V-shape post corona, with substantial increase in demand. ARB (June/July set records for their order book) and RPM (ove 50% increase in Bus/Truck tyres) both confirm this.

The other indicator is net cash, as reported throughout recent trading updates and aquisition notices. The below is taken from a post on another forum:

***
30/12/19:
Net cash 5.3 (17.7-12.4).
Paid out 750K (ITS) + 1.25m (dividend)=2m = 3.3m

27/5/20:
_with cash on hand at 30 April of $18.4m(net cash of $6.0m) _ie +2.7

30/6/20:
_cash on hand at 30 June 2020 of $20.8m(net cash of $8.5m)_ie +5.2

5/8/2020:
_Immediately prior to the completion date,NTD had cash of $25.4m _?*+9.8m* (can't tell exactly)
***

They've effectively shown FCF of $9.8m for 2H20, after accounting for dividends and acquisitions. It's not the most precise measure, as inventory would now be a little lower given increasing demand, but it certainly shows strength in the business.


Given current run-rate for all businesses involved is $450m revenue, if they can squeeze a 7% EBITDA margin out of the entire group*[*]* (NTD already doing 8%), you've acquired $31m of EBITDA for an effective EV of ~$80m (assuming net debt of ~$30m post-acquisition).
D&A should come in about $4-5m, so EBIT would then be about $26m. Finance costs $2-3m, making PBT ~$23m. Assuming 30% tax, ~$16.1m PAT*[**]*.

(Note, NTD already put cost cutting measures in place, becoming effective FY21. This will increase NTD margins coming into the increase in demand)

So my base case has me buying a business at about 20% above NTA (50cps purchase price), with a future expected profit of 14.2cps. It hardly seems demanding, and the downside is limited.

And whilst the debt level seems scary, their debt is on favourable rates, because it's backed by inventory. The lender seems to agree, given they extended credit during a pandemic.


Notes:
*[*] *T4U sells to larger customers with smaller margins, so I don't expect it to match NTDs future EBITDA margin. But it should improve significantly from the low of March/April.
*[**] *FX will also play with profits. May/June trading updates were with a higher AUDUSD. Reverting to previous levels (~60-65c) will impact the business.


----------



## galumay (18 August 2020)

Thanks Klogg, great detailed analysis there, very generous of you. I will have to have a deeper look, the debt level is way beyond my comfort zone and outside a hard rule in my metrics, but investing is a journey of learning and change!


----------



## Klogg (18 August 2020)

galumay said:


> Thanks Klogg, great detailed analysis there, very generous of you. I will have to have a deeper look, the debt level is way beyond my comfort zone and outside a hard rule in my metrics, but investing is a journey of learning and change!




I looked at this a few times before I was comfortable. I wouldn't blame you for concluding otherwise.

And just on the point of management, check this out (from the FY19 report):











You could probably count on one hand the directors that have ever gifted employees something that sizeable - out of their own pocket!


----------



## galumay (19 August 2020)

Thanks Klogg, I did notice that reading the old reports - it jumped out at me for the same reason, I must have read thousands of AR's, HY's & other presentations and I have never ever seen management do anything like it! (and most of my holdings have management/founders with "skin in the game" though high %'s of the issued capital.)


----------



## Jackass (20 August 2020)

Hi Klogg, I agree with your figures broadly with one important exception. If you read the announcement regarding how the debt is structured that they used to fund this purchase, you will see that the overdraft facility $5m has to be repaid in the next year. Also the Term loan has a repayment of $2.5m every year. So my numbers have the estimated profit after tax next year at ~ $10.8m or approx 9.5c a share due to the $7.5m in debt repayments due in the next year. Slightly more conservative. Still I would love to be wrong on this and for you to be right.
As an aside I do like the way the lender is forcing these repayments on them. It forces large repayments at a low interest rate which should see the principal reduce quickly. One thing to watch out for, the conditions give NTD the right to increase the trade finance borrowings by an amount equal to term loan repayments - so I will be keeping a close eye the trade finance borrowings to see if that goes up.
Another thing to note. This one has caught the attention of the Pros, I see Forager hold 5.81% of this. They did hold over 7% but have sold some recently - I assume due to risk management. Same problem as what I had I guess. Due to the rapid price rise this became a larger portion of my portfolio than I was comfortable with so I took some money off the table. Happy to have those types of problems though.


----------



## Klogg (20 August 2020)

Jackass said:


> Hi Klogg, I agree with your figures broadly with one important exception. If you read the announcement regarding how the debt is structured that they used to fund this purchase, you will see that the overdraft facility $5m has to be repaid in the next year. Also the Term loan has a repayment of $2.5m every year. So my numbers have the estimated profit after tax next year at ~ $10.8m or approx 9.5c a share due to the $7.5m in debt repayments due in the next year. Slightly more conservative. Still I would love to be wrong on this and for you to be right.
> As an aside I do like the way the lender is forcing these repayments on them. It forces large repayments at a low interest rate which should see the principal reduce quickly. One thing to watch out for, the conditions give NTD the right to increase the trade finance borrowings by an amount equal to term loan repayments - so I will be keeping a close eye the trade finance borrowings to see if that goes up.
> Another thing to note. This one has caught the attention of the Pros, I see Forager hold 5.81% of this. They did hold over 7% but have sold some recently - I assume due to risk management. Same problem as what I had I guess. Due to the rapid price rise this became a larger portion of my portfolio than I was comfortable with so I took some money off the table. Happy to have those types of problems though.




How does debt repayment reduce NPAT?


----------



## Klogg (20 August 2020)

Jackass said:


> Hi Klogg, I agree with your figures broadly with one important exception. If you read the announcement regarding how the debt is structured that they used to fund this purchase, you will see that the overdraft facility $5m has to be repaid in the next year. Also the Term loan has a repayment of $2.5m every year. So my numbers have the estimated profit after tax next year at ~ $10.8m or approx 9.5c a share due to the $7.5m in debt repayments due in the next year. Slightly more conservative. Still I would love to be wrong on this and for you to be right.
> As an aside I do like the way the lender is forcing these repayments on them. It forces large repayments at a low interest rate which should see the principal reduce quickly. One thing to watch out for, the conditions give NTD the right to increase the trade finance borrowings by an amount equal to term loan repayments - so I will be keeping a close eye the trade finance borrowings to see if that goes up.
> Another thing to note. This one has caught the attention of the Pros, I see Forager hold 5.81% of this. They did hold over 7% but have sold some recently - I assume due to risk management. Same problem as what I had I guess. Due to the rapid price rise this became a larger portion of my portfolio than I was comfortable with so I took some money off the table. Happy to have those types of problems though.




Also note they have an unused $5.5m Equipment finance facility. Given they're basically buying inventory, as they turn it over, they can repay the $5m overdraft and draw from the finance facility.

Effectively, there should be a net $3m FCF requirement ($5.5m + $2.5m - $5m) to pay back debt principle amounts, plus any interest.


----------



## Jackass (20 August 2020)

Sorry, I'm an Engineer not an accountant. So I have not treated the debt repayments correctly from a strict accounting viewpoint. My broader point still stands though - I have been slightly more conservative in my assumptions than you. Guess we will have to wait and see who is right. I really hope you are and I have been conservative.


----------



## Klogg (20 August 2020)

Jackass said:


> So I have not treated the debt repayments correctly from a strict accounting viewpoint.




Principal debt repayments dont reduce profit by any accounting standard, regardless of how strict you want to be. Only interest owed has this effect.

Are you talking about cash flow instead?


----------



## galumay (21 August 2020)

It would be nice if debt repayments did reduce profit, then I could claim them as an expense at tax time!

I ended up taking a position in NTD after some more research & analysis, thanks again @Klogg for you generosity is sharing your thoughts on the business.


----------



## Klogg (21 August 2020)

galumay said:


> It would be nice if debt repayments did reduce profit, then I could claim them as an expense at tax time!
> 
> I ended up taking a position in NTD after some more research & analysis, thanks again @Klogg for you generosity is sharing your thoughts on the business.




Good to hear, and glad my posts were helpful.

It's worth noting that many companies in this space are reporting consumer activity increasing (CAR, BAP, MNY). There are also links from early super release to increased car sales, which is concerning as this is a one-off.

Let's see government debt (Jobkeeper/seeker) has allowed the consumer to deleverage and start spending again.


----------



## Jackass (21 August 2020)

Sorry for the late reply on this. Day job got in the way.

Yes Klogg you are right, should have used the term cash flow, not profit. The larger point I was trying to make is that I don't think these are a safe buy as a dividend play. Making money should not be the problem - but an awful lot of the money they will make will have to go on the debt repayments.

Just a question on your point about the $5.5m unused equipment finance. Can they actually draw on that to meet the obligated yearly repayments? That equipment finance is for buying things like new vehicles, forklifts ect. Using it to meet debt repayments might breach the finance t & c 's? I would have thought that using it in that way would have been at the very least unethical. 
	

		
			
		

		
	






On the larger question of is the consumer going to buy more or less tyres - wear on mechanical components is a subject where I do have a little bit of expertise. Tyres in general fail or need replacing based on usage. They wear at a set rate per Km of use. Most people understand this instinctively. What may surprise people is that only about 11% of mechanical components actually follow this model.

As an aside there are other factors that will affect the tyre wear - driving styles, maintenance practices ect. There is also the chance of something random happening - driving over a nail, car accident ect. However these probabilities are also based on the no of Kms driven. Once again comes with the caveat that this may apply more to certain people than others. There are also infant mortality failures on tyres, 2 main causes here are manufacturing defects and incorrect fitment. However with modern manufacturing QA / QC and the fact that most tyres are fitted by trained mechanics / tyre fitters infant mortality in tyres is pretty low. Now the part that I like about this business - the end consumption of their product is not discretionary by any means. A cop can and will slap a defect notice on your car for bald tyres. Scalies will put truckies off the road for the same reason. So what the ultimate driver of tyre consumption is going to be is average no of Km's driven per person, number of vehicles on the road and freight movements by road.

So as we emerge into a post covid world some trends that may affect NTD:

Switching effect for holidays - people taking road trips instead of flying overseas. Likely to be a factor as international travel does not look like coming back anytime soon.
Offsetting this is decrease in commuting as more people work from home.
Population growth / increase in migration. This is likely to be down for the next few years however will eventually come back. If a vaccine comes this will come back in a big way.
A little bit of the consumer splurging and upgrading from cheap tyres to higher quality products. As already noted by the increase in ARB order book. Government handouts help here as well.


----------



## Klogg (24 August 2020)

Jackass said:


> Just a question on your point about the $5.5m unused equipment finance. Can they actually draw on that to meet the obligated yearly repayments?




Not directly, but think about the nature of the business. They buy inventory, then sell/distribute it for a slightly higher price.

Everything they bought was covered by assets, most of which was inventory. When they sell some of those, they can put that money toward existing lines of credit.
Then, when they buy more inventory to replace the stuff that's sold, they buy it using the Equipment finance facility.

It's the same outcome, whilst using the facility as intended.




> Offsetting this is decrease in commuting as more people work from home.



Not quite. We're now seeing people avoid public transport, in favour of driving. Purely to avoid close contact.

Second order effects aren't always what we think they are...


----------



## Jackass (25 August 2020)

Yes I understand that they buy the goods using their finance facilities and then sell / distribute for a profit. Without having access to the T & Cs of their finance, I would be surprised if they could use the equipment  finance facility to buy inventory. Generally speaking equipment finance can only be used to by machinery and equipment needed for the operations of the business.

What you are referring to, the purchase of new inventory to replace inventory as it gets sold, should show up as drawings on the trade finance facility - of which they still have plenty unused. And maybe the contingent liability facility if they use letters of credit.

I can hear people now "FFS who cares if it shows up as equipment finance or trade finance drawings". Well it is a subtle distinction but an important one, as it gives clues where to look for leading indicators of the business not performing as well as expected. If we start seeing inventory go up and trade finance drawings go up with it - it indicates an inventory management problem.


----------



## galumay (12 November 2020)

A positive update to guidance following the last 4 months trading, seems like the acquisition is already bedding down well & adding value.
Remains to be seen how well the new business performs post covid, its priced now as if the present is the new normal, like so many other beneficiaries of the pandemic. 

I won't be adding at current prices but may look to increase position size on any decent dips.


----------



## Jackass (14 November 2020)

Don't have much to add..... Happy with the trading update of course, looks like it is going well. Will be waiting for the half yearly to have a closer look at how things are going. Management have indicated that they prefer to hold cash / pay down debt which I am also happy with. Still a happy holder.


----------



## galumay (14 November 2020)

Yes, @Jackass, I noticed that bit about considering future divvies in the light of debt levels - something I wish more companies considered.


----------



## mcgrath111 (23 January 2021)

Nice announcement made after cob on Friday arvo. 

I don't want to speak too soon, but I the board appears honest and straight to the point, I think I'll be a long term holder.


----------



## galumay (24 January 2021)

mcgrath111 said:


> I don't want to speak too soon, but I the board appears honest and straight to the point, I think I'll be a long term holder.




Yes they seem so, I have been impressed with their communications since I took a position last year. Of course its never going to be an exciting business of have massive growth, but owning these little companies that operate in boring and overlooked sectors can be very rewarding.


----------



## Jackass (25 January 2021)

Yep very good announcement on Friday. Some quick and dirty back of the envelope number crunching suggests that even after the massive run up in the share price, these are not exactly expensive.

With the caveat from the latest announcement about the uncertain business environment noted, I make these to be trading on an annual EV/EBITDA multiple of ~ 4.6 at a share price of $1.05 which is hardly demanding.

Looking at the cash that they have managed to accumulate in the 4 months since the T4U buy, they have managed to accumulate ~ 10.8 mill. Annualising this gives a P/CF multiple of 3.7, once again hardly demanding.

As others have noted management seems to be honest and competent. However for me the question is what do they do with this cash, as the high Aussie $ and low interest rate tail winds may change very quickly. For me I would prefer to see them pay down Debt very aggressively, or at the very least hold the cash and get into a net cash position as quickly as possible.

That said, I still hold these and do like them. They just have to keep doing what they are doing for this to be a good investment. No massive growth assumptions needed.


----------



## galumay (25 January 2021)

@Jackass management have stated an intention to pay down the debt quickly, its definitely a test of their capital allocation. I will be watching for execution in the HY report, until then I will continue to hold. Its now a double bagger for me in under 6 months which is pretty crazy for a tyre seller!


----------



## galumay (13 April 2021)

A trading update released late yesterday has NTD guiding for a better than previously expected H2 2021, they are indicating basic EPS this year of 17c. Management appear to be consistently under promising and over delivering - a hallmark of some of the better businesses I have owned.


----------



## galumay (16 June 2021)

NTD popped by up to 15% today on no news, its pretty tightly held so investors probably have to just pay up if they want to take a position. Obviously something has stirred some interest!


----------



## galumay (31 August 2021)

As expected, a very strong FY 2021 for NTD, this has been a great investment for me. 8c divvy this year is about a 15% return on my cost price 1 year ago! Up 140%.


----------



## Dona Ferentes (2 November 2021)

_NTD has added a further business_

National Tyre & Wheel Limited  acquires *Black Rubber *for up to $26.3 million in cash and scrip 

Highly complementary strategic fit, increasing NTAW’s truck tyre customer base and introducing a tyre retreading capability
NTAW annualised revenue expected to be more than $520 million
EPS Accretive, expected EBITDA contribution of $5.5m and NPATA accretion of 2.5 cps annualised
The purchase price for the acquisition is a combination of cash and scrip and is payable as follows: 
_ ▪ a cash payment of $19.9m will be made at completion; 
 ▪ the issue of 1,071,430 fully paid ordinary shares in NTAW at an issue price of $1.12 per share, based on the 10-day volume weighted average price per share in the period ended on 29 October 2021, with a value of $1.2m;  
▪ an earn out payment up to $2.6m based on the Black Rubber’s EBITDA result in FY22; and 
▪ a further earn out payment up to $2.6m based on Black Rubber’s EBITDA result in the year ending 30 June 2023 with the ability to earn a “catch-up” if the EBITDA target for FY22 is not met in full.   _

The cash component of the completion payment was funded from NTAW’s existing cash reserves and debt facilities. Pushing higher up to  $89M

_More than 60% of Black Rubber’s revenue comes from selling truck, bus and agricultural tyres to commercial fleets and other B2B customers. Usually, the products are accompanied by one or more of the value-adding services. Black Rubber operates as a tyre importer and retailer in WA (Perth and Port Hedland), QLD (Brisbane) and NSW (Sydney).   _

_Wrt commercial tyres for trucks and buses; customers in this segment include truck fleet operators who prefer to deal with suppliers capable of an expansive product and service offering covering, amongst other things: pricing based on a cents per kilometre solution; tyre performance monitoring; fitting at customer depots; and retreading capabilities._


----------



## galumay (3 November 2021)

Looks like a sensible acquisition at a reasonable price.


----------



## galumay (22 February 2022)

H1 of 2022 hasn't been good for NTD, I now wonder if their aggressive acquisitions may have been ill timed given the obvious impacts of covid on the business. The debt is my biggest concern, its now grown to the point that I would not invest in the business. The negative FCF is a further worry. I am going to have to have a think about what I do with my position in NTD.


----------



## Jackass (23 February 2022)

Agree. I got out of this one a couple of months ago when shipping costs started to go crazy. I figured that excessive shipping costs would destroy their already razor thin margins. A quick scan of the results this morning and I am not keen to jump back in any time soon.

Am also a little bit disappointed in management. Previous commentary indicated that they were looking to keep the debt levels down, instead it has gone up.


----------



## Dona Ferentes (27 July 2022)

And down 15%, touching 90c



> As expected, trading conditions in FY21 proved to be unusually buoyant following substantial government stimulus in response to the pandemic, robust consumer demand, a stronger Australian dollar, supplier support and predictable shipping times and prices.






> Most of these conditions did not exist throughout FY22.



_Unambiguously ambiguous. _


----------



## galumay (27 July 2022)

I should have sold in Febraury when the rising debt was the first red flag for me. Broke one of my key rules which is no or very little leverage. The drop in profit due to short term impacts doesnt worry me, many businesses will have these headwinds over the next couple of years, its the fragility created by the leverage that makes it a high risk investment now. I think earnings/FCF will drop by 50% this year.


----------



## sptrawler (27 July 2022)

galumay said:


> I should have sold in Febraury when the rising debt was the first red flag for me. Broke one of my key rules which is no or very little leverage. The drop in profit due to short term impacts doesnt worry me, many businesses will have these headwinds over the next couple of years, its the fragility created by the leverage that makes it a high risk investment now. I think earnings/FCF will drop by 50% this year.



With the cost of fuel, people are driving less and the last things people want to spend money on when things get tight, is the car.


----------



## galumay (27 July 2022)

sptrawler said:


> With the cost of fuel, people are driving less and the last things people want to spend money on when things get tight, is the car.




Agreed, but that doesn't worry me, economic cycles will come and go, profits go up and down. Its the capital misallocation and resultant increased risk that I should have sold out on.


----------



## Dona Ferentes (31 August 2022)

Wheels come off . Down 10%


----------



## Dona Ferentes (25 December 2022)

Dona Ferentes said:


> Wheels come off . Down 10%



_And again, dropping on the update  Now 55c and way down, a near 70% fall in the year. Not much tread left_?

NTD expects 1H23 revenue will be between $290m and $300 ($251m in 1H22) at an estimated gross margin of 26.5% (29.0% in 1H22), delivering Operating EBITDA between $13m to $14m ($20m in 1H22) and Operating NPATA between $1m to $2m ($8m in 1H22). Operating EBITDA will exclude non-recurring and abnormal expenditure of approximately $0.7m. It is pleasing that sales volumes will likely meet previous expectations. 

However, *gross margins* have not 
been maintained in some business units following substantial increases in cost of goods over the past 12 months. In response, NTD continues to negotiate lower prices from suppliers and raise selling prices to restore gross margins. The recent significant reduction in inbound freight costs and a continuing and sustained improvement in the AUD:USD exchange rate will assist that effort.


----------

