Declining Capital Efficiency at Turners Automotive Group: A Looming Challenge for Sustained Profitability

The investment case for Turners Automotive Group has long hinged on its ability to balance operational resilience with disciplined capital allocation. Yet, recent financial disclosures suggest a troubling divergence between profitability and capital efficiency. According to a Yahoo Finance report, the company's return on capital employed (ROCE) for the trailing twelve months to March 2025 stood at 7.1%, significantly below the 16% average for the Specialty Retail industry. This underperformance, despite a 17% year-over-year increase in net profit after tax (NPAT) to NZ$38.6 million, underscores a critical challenge: the company's capital is no longer generating returns commensurate with its scale, as reported by Autocar NZ.

The Paradox of Profitability and Capital Efficiency

Turners' FY2025 results highlight a paradox. While net income rose and profit margins improved to 9.3% from 7.9% in FY2024, capital employed in the business surged by 84% over five years, according to the Yahoo Finance report. This suggests that the company has not effectively deployed incremental capital into high-return investments. Such a trend is unsustainable in the long term, as noted in the Yahoo Finance report, because it erodes shareholder value by prioritizing growth in assets over returns. The disconnect is further exacerbated by the fact that revenue remained flat at NZ$414.2 million in FY2025 compared to FY2024, even as net income grew, a point highlighted by Autocar NZ. This implies that profitability gains are being driven by cost discipline and margin management rather than organic growth in revenue or returns on invested capital.

Capital Allocation: A Double-Edged Sword

Turners' capital allocation strategy has increasingly relied on non-core segments to offset declining returns in its auto retail division. The finance, insurance, and credit management divisions contributed significantly to FY2025 results, with profits rising 31%, 13%, and 11%, respectively, according to the H2 FY2025 earnings call. While this diversification has stabilized earnings, it also reflects a shift away from the company's core automotive retail business, which has faced margin compression due to macroeconomic headwinds. During the H1 FY2025 earnings call, CEO Todd Hunter acknowledged a "year of two halves," with the first half marked by weak demand and the second half seeing margin recovery as pricing stabilized, as discussed in the FY25 annual report. However, this volatility raises questions about the sustainability of relying on cyclical demand in finance and insurance to prop up overall profitability.

Moreover, the company's focus on leveraging its property portfolio-a key component of its long-term strategy-has not yet translated into improved ROCE. As shown in the StockInvest financials, Turners holds significant latent value in real estate, yet this asset class remains underutilized for generating returns. Instead, the company has prioritized dividend yields, with total annual dividends rising to 29 cents per share in FY2025, a fact noted on the H2 FY2025 earnings call. While this approach may satisfy short-term shareholder expectations, it risks underinvesting in high-growth opportunities that could restore capital efficiency.

Profitability Compression: Structural or Cyclical?

The compression of profitability at Turners appears to stem from both structural and cyclical factors. On the structural side, the company's capital-intensive model-evidenced by the 84% increase in capital employed-has not been matched by a corresponding rise in returns. This is a red flag for investors, as it suggests misallocation of resources into low-productivity assets. On the cyclical side, macroeconomic pressures, including inflation and tighter credit conditions, have dampened auto retail demand, forcing the company to rely on its finance and insurance arms for growth, a dynamic discussed in the FY25 annual report.

Operational metrics further highlight these challenges. Data from Marketscreener indicates that Turners' Days of Inventory Outstanding (TTM) and Days of Sales Outstanding (TTM) have lengthened, tying up working capital and reducing liquidity, as shown in the StockInvest financials. While management has emphasized cost control and disciplined credit management, these measures alone cannot offset the drag from declining capital efficiency. The payout ratio, a key indicator of reinvestment priorities, also suggests a heavy focus on dividends over growth, which could hinder the company's ability to adapt to shifting market dynamics, per the StockInvest financials.

The Path Forward: Rebalancing Capital and Expectations

For Turners to reverse its declining capital efficiency, it must address two critical issues: reallocating capital to higher-return opportunities and reinvigorating its core auto retail business. The company's FY2025 acquisition of My Auto Shop-a move aimed at expanding premium finance and auto services-signals a step in the right direction, according to the Yahoo Finance report. However, such initiatives need to be scaled rapidly to meaningfully impact ROCE. Additionally, the company's branch expansion plans in Napier, Tauranga, and Christchurch, supported by strong banking relationships, could provide a much-needed boost to revenue growth, as outlined in the FY25 annual report.

Investors, however, should remain cautious. As noted by Yahoo Finance, the path to restoring capital efficiency will require not only strategic reinvestment but also a cultural shift toward prioritizing returns over growth-at-all-costs. Until Turners can demonstrate that it can deploy capital as effectively as its peers, the risk of profitability compression will persist.

Conclusion

Turners Automotive Group's FY2025 results, while commendable in terms of net income growth, mask a deeper malaise in capital efficiency. With ROCE lagging the industry average and capital employed growing at an unsustainable rate, the company faces a pivotal juncture. The reliance on non-core segments and dividend payouts may provide temporary relief, but they cannot substitute for a coherent strategy to enhance returns on invested capital. For investors, the key question is whether Turners can rebalance its capital allocation priorities to align with long-term value creation-or whether its current trajectory will lead to a prolonged period of underperformance.