TGA - Thorn Group

[So_Cynical]

I have held stocks for a few hours and for a few years (currently holding RRL since Aug 2010 - does that meet your multibagger criteria), the time period is determined by the stock

So with your RRL position time has been very relevant in the share price increase.

You misunderstand the hold in only one direction only concept, time is irrelevant.

And yet now time is somehow irrelevant?

RRL like all the Goldie's has had major ups and downs and yet you have chosen to ignore the small pull backs. :dunno:

 

[Boggo]

So with your RRL position time has been very relevant in the share price increase.

And yet now time is somehow irrelevant?

As is quite common you have obviously only picked out the bits that you want, if you had read all of the posts you might understand why I mentioned the period of time that I have held RRL.
You may also establish that time is not the determining factor, it is simply an observation of how long the trend and my position has held (good god, why am I bothering to spell this out ).

There are two lines on my weekly chart (below) of RRL that tell me everything I need to know about this stock on a constantly updated basis.

Why would I need to be misled by the same out of date and misleading buy recommendations based on potential valuations sucha as those that existed on ONE, HIH and KZL (to name just a few) as they went bust.

You guys would probably be interested in Harris Scarfe, they may be going to relist again ten years after they went bust.

Here is part what Colin Nicholson wrote about them the last time...
Twelve months ago, Harris Scarfe would have looked quite good on fundamentals. I do not have the data, but my guess is that its historical dividend yield was high and its historical PE ration quite low. So, it would have looked good value. That is, unless you could see the problems the company was running into. I gather in this case that there was fraud involved, so it seems to have been hidden from everyone. I therefore think that you have unfairly blamed the broker for what is effectively failure to know the unknown.

As a technical analyst and trader, Harris Scarfe was on my watch list as a potential buy less that twelve months ago. The reason why I did not buy it was evident on the chart of its share price. Harris Scarfe had seen a long decline and was levelling out in 2000. By mid to late 2000, it had started to look like an ascending triangle, which is a bullish reversal pattern. However, it is never complete and a buy signal given until we get an upward breakout. So, like the broker, I was interested in Harris Scarfe, but awaiting a signal.

In the end the pattern failed, so I never bought it. This is the real advantage of charts. The fundamental news came only a month or so ago, but someone knew late last year and that was signalled on the chart.
(Colin Nicholson)

PS. I am not going to comment further on this thread as we are going around in circles, we are off the topic of TGA and I am off to Zurich on Wed morning.

(RRL - click to expand)

 

[McLovin]

I do not have the data, but my guess is that its historical dividend yield was high and its historical PE ration quite low

Best FA I have seen yet.

 

[kermit345]

I was thinking the same McLovin, hasn't seen the data and has only referenced 2 points of an entire companies financial position. Some of us here can see where you coming from Boggo and I agree, its best to enter a stock when its starting/in an uptrend. It seems like Nutmeg is either against this concept or doesn't understand it which is fine, his fundamental approach may be just as successful.

Boggo has a pure technical entry and momentum approach and Nutmeg has a pure fundamentals approach, some of us aim to achieve both if/where possible.

I think we should get back on track with how it applies to TGA without badmouthing or talking down on the opposites approach.

My view is that TGA is fundamentally sounded and grossly undervalued at the moment and that it will at some stage in the future revert back to this valuation (or very close anyway). However since mid February, after trading sideways for a few months, it has resumed its downtrend off the back of continued selling pressure from perpetual. When this downtrend is broken i'll be adding to my position providing the fundamentals do not change drastically.

 

[Nutmeg]

I read Macquarie's valuation of TGA in the lastest analyst's report.

In the half year TGA grew both revenue and profit. Revenue grew by 20% while profit grew by 30%. Up to the half year, therefore, TGA was growing earnings faster than revenue. At the same time, the Macquarie report estimates lower revenue for TGA for FY2012 compared to FY2011, i.e. $157.6m in 2011 compared to $155.2m for 2012 (estimated). Is anyone able to make sense of that? Why would TGA's revenue decline for FY2012 after reporting a 20% rise to the half year?

The answer may lie the half year report which I'll check later. But someone might know off the top of their head.

 

[Klogg]

One reason could be this:

Product mix changing: TGA has seen a change in its product mix over the last few reporting
periods. TVs and PCs, which have historically been very strong growth contributors, have come
under pressure in recent times with significant price deflation in the former and cannibalisation of
desktop PCs in favour of tablets.
As a consequence, TGA has seen a drop-off in finance leases (-9.7% at 1H12) and a
corresponding impact on revenue, given a greater proportion of revenue is recognised in Yr 1 for a
finance lease vs operating lease due to the retail margin recognition as well as interest received.
Furniture continues to experience very strong growth (+30–40%) as does exercise equipment
(+50%), which are both accounted for under

 

[Pioupiou]

On the topic of 12mth SP targets, may I ask what the most bearish is that you've heard, Pioupiou?

I cannot recall the lowest TA-based opinion has been, but weeks ago one was $1.41, which has turned out to be true. I have a vague notion somebody mooted $1.31, but that could be the product of my scrambled mind.

As far as relatively recent FA reports are concerned, I think the lowest 12-month target SP is that of Macquarie at $1.78, but buried in that report there is a range of $1.63 to $1.93, so $1.78 is the mid-point. In the last six months I have seen valuations as high as $2.53, so I suppose the range is $1.63 to $2.53. My own valuations range from about $1.80 to $2.60 (mid-point $2.20), That the range is wide is not surprising, because TGA's earnings growth and the required rates of return (RRR) used varies from person to person, and each individual will often have a range of possible SPs.

For FA, the two most important factors required to be invented are the RRR and a growth factor to apply to EPS, or dividend per share, or EBIT per share, depending on the valuation methodology used. The methodology used also requires one to tinker with the RRR.

The market and the likes of Macquarie have assumed that TGA's growth will fall away, which may not transpire to be correct. Even if growth falls away from the primary profit engine, household items under either operating or financial leases, this implies less money will be required to buy the items, and hence dividends can be increased, either directly or by diminishing the number of shares via buyback. If one thinks growth is going to cease increasing, or even decline, then you will end up with a low target valuation, as will also happen if one uses a high RRR. As an aside, TGA's tendency to switch from financial leases to operating leases will (because of revenue recognition conventions) lower earnings in the year of goods delivery, but fundamentally, it does not make a difference to the cashflow and the underlying strength of TGA.

One has to tinker with the RRR to accommodate the valuation methodology. For instance, if one multiplies EBIT by 7, it implies an RRR of 1/7, but if one used an EPS x PER approach, the 1/7 should be adjusted to recognise that EPS has been taxed at 30%, so the equivalent RRR in Australia to be applied to after-tax earnings should be 1/10, which translates to a PER of 10. For most valuation methodologies, franking credits should be accommodated too, because one would want to value a firm with franking credits higher than one would if it did not have such credits.

Building up the RRR to be used requires more thought than one suspects occurs in many SP valuations. If one has funds sitting in other investments earning 6% before tax, for example, why should one require a RRR of 1/7 (14.3%) for TGA before tax, or 10% after tax? Each investor's RRR should be different, because their baselines differ (a mortgage payer could use that rate as an after-tax baseline), and then each person's risk perceptions are different, as are other factors like their marginal rate of tax – all of which alter the RRR that is apt for each investor's circumstance. Simple methodologies that do not patently have growth factors, should accommodate growth in the RRR, or to invert it, the PER.

If you want to use FA to second guess how the market is going to value TGA, then you will have to use more rule-of-thumb approximations of market conventions, rather than those peculiar to your situation. J M Keynes had the view that stock valuation is not a prediction but a convention that facilitates investment and ensures that stocks are liquid despite being underpinned by illiquid businesses.

My low-end $1.80 SP for TGA springs from a peculiar-to-me set of calculations based on dividends, whereas my high-end $2.60 is based on an expected EPS of about 20 cents for YE 30/03/2012, multiplied by a PER of 13 because that is not unreasonable if one looks at PERs that the market ascribes to ASX stocks of equivalent, and often inferior, quality to TGA. I believe that when the quality of TGA is better understood, the PER will trend towards 13, but how long this will take I cannot say. The upcoming annual report (the sixth since listing) could be the catalyst to lift the PER that the market ascribes to TGA.

 

[Nutmeg]

One reason could be this:

But where is the "corresponding impact on revenue" overall? Between FY2009 and FY2010 TGA grew revenue by 12.7%. Between FY2010 and FY2011 revenue grew by 8%. To 1H2012 revenue grew by almost 20%. Allowing for a drop-off in finance leases, where is the impact on revenue?

 

[Klogg]

But where is the "corresponding impact on revenue" overall? Between FY2009 and FY2010 TGA grew revenue by 12.7%. Between FY2010 and FY2011 revenue grew by 8%. To 1H2012 revenue grew by almost 20%. Allowing for a drop-off in finance leases, where is the impact on revenue?

To be honest - I have absolutely no idea. In fact, the report is quite contradictory:

As announced at the 1H result, TGA has secured a new PDL investment as well as a warehouse contract, which will positively impact 2H12 revenue by $5m and 1H13 revenue by 3m. This should help to offset some of the ATO impact.

I don't quite follow their logic, but it doesn't really bother me to be honest.

 

[Nutmeg]

To be honest - I have absolutely no idea. In fact, the report is quite contradictory:



I don't quite follow their logic, but it doesn't really bother me to be honest.

That makes two of us. A lot of analysts' reports often appear banged out without a great deal of thought having gone into them - evidence of the cookie-cutter-approach to financial analysis.

As long as TGA continues moderate revenue growth, it seems to me that its operating leverage will be able to translate that growth into relatively higher profit growth. That's the message, at any rate, that I take away from the half year report.

 

[Pioupiou]

I read Macquarie's valuation of TGA in the lastest analyst's report.

In the half year TGA grew both revenue and profit. Revenue grew by 20% while profit grew by 30%. Up to the half year, therefore, TGA was growing earnings faster than revenue. At the same time, the Macquarie report estimates lower revenue for TGA for FY2012 compared to FY2011, i.e. $157.6m in 2011 compared to $155.2m for 2012 (estimated). Is anyone able to make sense of that? Why would TGA's revenue decline for FY2012 after reporting a 20% rise to the half year?

The answer may lie the half year report which I'll check later. But someone might know off the top of their head.

Klogg has partly answered your question - the shift towards operational leases tends to spread revenue recognition away from Y1. This will change earnings in Y1, but not change the cashflow. Revenue recognition when ownership passes is simply an accounting convention - it has little to do with the underlying soundness of the business - something you should accommodate when ascribing a target SP to TGA.

With TGA, the "Sales" metric is misleading, perhaps to the point of suggesting that you should ignore it, because the only items recorded there, I think, are financial leases and returned items sold, rather than rented. Significant income bypasses the Sales account. Profit as a percentage of revenue will increase as TGA shifts from thin-margin electronic items to more profitable furniture lines.

Macquarie noted that there had been significant customer growth in recent years, and a modest growth in 1H of YE 30/03/2012, so the analyst assumed that 60% of the earlier growth will drop out on expiry of contracts, and not enough new customers found to retain the growth of the recent past. This could be countered by opening more rural outlets (where TGA performs well), improving city business via kiosks and stores serviced from hubs of low-rent warehouses, increasing the revenue per customer, growing the customer retention rate (now 40%), adding new product lines (garden furniture and nursery items like cots and car seats, are currently being trialed) and growing the smaller units like Cashfirst, Thorn Equipment Finance and NCML. One of the businesses, probably Thorn Equipment Finance, does considerable TAB-related business supplying PCs to pubs and clubs, and TGA is keen to extend this to items like poker machines. With so many options, I am more bullish about TGA's ability to grow earnings than most folk who have an opinion on the matter. The upcoming report may shed light on this area.

I had intended to thoroughly analyse the Macquarie report, but I got sidetracked into investigating the so-called EV/EBIT valuation technique that was used.

 

[Pioupiou]

Macquarie states there are 146.4 share in TGA, and it proffers EBITs for YE 30/03/2012 and the following two years as $40.0m, $39.9m and $40.5m. Actually, TGA's 1H results have the EBIT as $24.852m and $19.515m for the previous year's first half, so it looks like Macquarie is incorrect, and the EBIT that Macquarie should have used is circa $50m. Macquarie has effectively used an EBIT multiplier of 5.2, because 50*5.21/146.4 = $1.78.

With an assumed EBIT for YE 30/03/2012 of about $50 million, the multiple currently applying must be about 4.1, because 50*4.11/146.4 = $1.40. An EBIT multiple of 4.1 is far below the average of ASX listed stocks. WOW's EBIT multiplier is about 10. If we used a multiplier of 6 for TGA, we would get an SP of about $2.05, and if we picked 7, we would get about $2.40, which is within the range of where I think TGA's SP should be, based on fundamentals.

 

[Nutmeg]

... the EBIT that Macquarie should have used is circa $50m.

Why would you assume $50m EBIT for FY2012? That seems a bit high to me. I agree that Macquarie have probably low-balled estimated EBIT for FY2012 at $40m but not by a difference of $10m.

 

[Klogg]

Why would you assume $50m EBIT for FY2012? That seems a bit high to me. I agree that Macquarie have probably low-balled estimated EBIT for FY2012 at $40m but not by a difference of $10m.

Looking at high level figures, I can't really tell - but does someone know which half usually performs better? (I'm being lazy, lol)

If it's the second, then $50mil is definitely accurate.

 

[Nutmeg]

Looking at high level figures, I can't really tell - but does someone know which half usually performs better? (I'm being lazy, lol)

If it's the second, then $50mil is definitely accurate.

I consider FY2012 EBIT of $50m high because I don't know where Pioupiou has got 1H2012 EBIT of $24.852m from. It was $21.3m.

 

[Pioupiou]

Why would you assume $50m EBIT for FY2012? That seems a bit high to me. I agree that Macquarie have probably low-balled estimated EBIT for FY2012 at $40m but not by a difference of $10m.

The half year ending 30/09/2011 report reports EBIT thus:

- - - - - - - - - - - Rental - - - - Credit Mngmnt - - - - Other - - - - Consolidated
- - - - - - - - - - 2011 - 2010 - - 2011 - 2010 - - - - 2011 - 2010 - -- 2011 - 2010

EBIT($000) - 22,136 20,052 - 2,275 - - nil - - - - - 441- - (537) - 24,852 19,515

I have changed "Earnings before interest and tax" to EBIT so if you search the 1H report (Condensed consolidated interim financial report 30 September 2011) for that, or one of the metrics like "22,136", you should find the spot where the above is recorded.

If you double the 24,852 for H1, you get about $50,000K for the full year ending 30/03/2012 - it could be a bit lower. The annual report for 30/03/2011 did not provide an EBIT figure, but in one of the presentations EBITDA was given as $34 million, so EBIT would be higher to the tune of any depreciation and amortisation expenses. Morning Star has the YE 30/03/2011 EBIT as $32.7m, but this is unlikely to be correct if TGA stated that EBITDA was $34m. Macquarie may have doubled the 19,515 to get its circa $40,000K EBIT - who knows.

 

[Pioupiou]

The half year ending 30/09/2011 report reports EBIT thus:

- - - - - - - - - - - Rental - - - - Credit Mngmnt - - - - Other - - - - Consolidated
- - - - - - - - - - 2011 - 2010 - - 2011 - 2010 - - - - 2011 - 2010 - -- 2011 - 2010

EBIT($000) - 22,136 20,052 - 2,275 - - nil - - - - - 441- - (537) - 24,852 19,515

I see where I have erred - the above figures are the operating EBIT - there are other corporate expenses of:

Other corporate expenses (3,597) (3,409)
Net Financing costs (933) (189)
Profit before tax 20,322 15,917

Some of these must come off the operating EBIT that I used. Elsewhere one can read "This flowed through to a 32.3% increase in earnings before interest and tax at $21.3m, up from $16.1m."

Mea culpa, mea culpa, mea maxima culpa. I'll order a lashing with birch rods tonight.

 

[Nutmeg]

I think TGA's EBIT multiple of between 5 and 6 to the FY is probably - conservatively - accurate.

 

[Pioupiou]

There is a recent bullish analysis of TGA at http://unconventional-wisdom.com.au/investment/equities/thorn-group-bruised-but-not-beaten/

I do not disagree with the analyst, but I am sure many would, because he suggests a target SP of $2.40, derived by simply multiplying an estimated EPS of 20 cents by a PER of 12. A PER of 12 is akin to an RRR of 1/12, or 8.33%. A year ago when the SP closed a few times at just under $2.30 on an EPS of 16.7 cents, TGA enjoyed a PER of about 13.6.

If we use the $21.3m EBIT mentioned in the report for the H1 ended 30/09/2011 to estimate the YE 30/03/2012 full year EBIT as $42.6m, then with 146.4 million shares, we need an EBIT multiplier of 8.25 to get a target SP of $2.40, which is also on the high side. In loose terms, dividing 8.25 by .7 (to accommodate 30% tax) should come close to the PER of 12, which it does - 8.25/.7 = 11.8.

 

[Nutmeg]

If we use the $21.3m EBIT mentioned in the report for the H1 ended 30/09/2011 to estimate the YE 30/03/2012 full year EBIT as $42.6m, then with 146.4 million shares, we need an EBIT multiplier of 8.25 to get a target SP of $2.40, which is also on the high side. In loose terms, dividing 8.25 by .7 (to accommodate 30% tax) should come close to the PER of 12, which it does - 8.25/.7 = 11.8.

$2.40 is considerably over anything I've valued TGA at. The valuation arrived at by Donnelly Wealth Management is a good example of the weakness of using a P/E ratio alone to reach a realistic near term valuation.