TGA - Thorn Group

[Pioupiou]

$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.

The Donnelly report did not attempt to derive a near-term valuation. The report does not say so, but target valuations are typically 12 month targets. Also, in the paragraph where the multiple of 12 is mentioned, the report refers to investors, not speculators.

If you are an investor, and a PER of 12 seems toppy, then use a lower one, or some other FA methodology. All FA valuation methodologies rely on the concept of a required rate of return (RRR), and all long-term investors use them, sometimes without even knowing that there is an RRR lurking behind the rules of thumb multipliers that they use. The higher the multiplier, the lower the RRR.

If you want to second-guess a near-term price, then TA is the way to go, or some other empathetic way of guessing what Mr Market is going to do in the immediate future.

We have done this FA vs TA topic to death. If you have an immediate craving for avocados, you mosey to the shop and buy them, but if you want to invest in avocados, you plant avocado trees, and wait a few years. Both approaches to obtaining avocados are valid, and nobody bothers to debate the Buy Avocados vs Grow Avocados topic.

 

[Nutmeg]

The Donnelly report did not attempt to derive a near-term valuation. The report does not say so, but target valuations are typically 12 month targets.

12 months is near term. Otherwise agree.

 

[odds-on]

The Donnelly report did not attempt to derive a near-term valuation. The report does not say so, but target valuations are typically 12 month targets. Also, in the paragraph where the multiple of 12 is mentioned, the report refers to investors, not speculators.

If you are an investor, and a PER of 12 seems toppy, then use a lower one, or some other FA methodology. All FA valuation methodologies rely on the concept of a required rate of return (RRR), and all long-term investors use them, sometimes without even knowing that there is an RRR lurking behind the rules of thumb multipliers that they use. The higher the multiplier, the lower the RRR.

If you want to second-guess a near-term price, then TA is the way to go, or some other empathetic way of guessing what Mr Market is going to do in the immediate future.

We have done this FA vs TA topic to death. If you have an immediate craving for avocados, you mosey to the shop and buy them, but if you want to invest in avocados, you plant avocado trees, and wait a few years. Both approaches to obtaining avocados are valid, and nobody bothers to debate the Buy Avocados vs Grow Avocados topic.

Pioupiou,

I appreciate your TGA analysis on this thread, please continue. Agree FA vs TA topic has been done to death. The whole PE, DCF, EBIT/EV, RRR, blah blah blah is circular and boring. What this thread does show is that there are a number of posters who agree that owning a part of TGA business is worthwhile - this is a very important point. A dozen investors will never agree on the precise value of a business or investment timeframe or required return but they should however agree whether it is worth holding a part of that business.

Has anybody actually got a view against owning a part of the TGA business over the medium term (5 years)?

Cheers

Oddson

Please note I hold a large % of my investment funds in TGA.

 

[McCoy Pauley]

Rudi Filapek-Vandyck and John Murray debate TGA on last Friday's boardroom radio roundtable. Quite an interesting discussion about why TGA's share price is in a downtrend compared to FXL's share price.

John Murray again noted that he's a big fan of TGA's management (especially its managing director).

FWIW, I believe that TGA is impacted by the cheap prices at which people can now buy TGA's stock outright, rather than going through a hire-purchase arrangement with TGA. So long as I can buy a TV at ridiculously low prices (compared to a few years ago) why would I go to TGA to buy it? IMO, there may well be a squeeze on TGA's performance over the last 12 months when the results are released later this month.

Also, I noted Macquarie's point that people are now diversifying their consumption of electronic media away from the TV and onto tablet computers, mobile phones and the like. IMO, as broadband prices continue to fall, more and more people will start consuming their media needs on non-traditional devices and the need to buy a flat-screen TV, either outright or through TGA, will decline for some market segments.

 

[Klogg]

Rudi Filapek-Vandyck and John Murray debate TGA on last Friday's boardroom radio roundtable. Quite an interesting discussion about why TGA's share price is in a downtrend compared to FXL's share price.

John Murray again noted that he's a big fan of TGA's management (especially its managing director).

FWIW, I believe that TGA is impacted by the cheap prices at which people can now buy TGA's stock outright, rather than going through a hire-purchase arrangement with TGA. So long as I can buy a TV at ridiculously low prices (compared to a few years ago) why would I go to TGA to buy it? IMO, there may well be a squeeze on TGA's performance over the last 12 months when the results are released later this month.

Also, I noted Macquarie's point that people are now diversifying their consumption of electronic media away from the TV and onto tablet computers, mobile phones and the like. IMO, as broadband prices continue to fall, more and more people will start consuming their media needs on non-traditional devices and the need to buy a flat-screen TV, either outright or through TGA, will decline for some market segments.

Agree 100% on the TV and electronics front. However, you'll notice that management have already taken steps to prevent loss of revenue as a result by opening the furniture and exercise equipment market. They've seen huge amounts of growth in these areas, as the half-yearly shows.

As for cheaper prices, I agree that the person on the average wage would be able to buy things outright, but for those on the lower end, this is alot harder. It's much easier to pay $20 a week for a year, than it is to pay $800 up front (probably not the most accurate figures, but you get the idea).

This is only really an issue though if you see the AUD maintaining above, or close to, parity with the USD. In all honesty, I can't see it maintaining > 90c for too long.

 

[Pioupiou]

12 months is near term. Otherwise agree.

OK, now I presume that we are talking about FA, and we are thinking twelve months ahead. Because we can anticipate that the EPS will be about 20c for YE 30/03/2012, what will the EPS then be for 30/03/2013? Below is EPS history, with YE 30/03/2012 at 20 cents – it could be half a cent either side of that.

5.1 - - - 8.3 - - - - 9.4 - - - - 14.9 - - - 16.7 - - - 20.0
- - - - 62.75% - 13.25% - 58.51% - 12.08% - 19.76%

The foregoing is a compound annual growth of 31.5%, which is too bullish to entertain. Is it reasonable to use the worst growth year of about 12%? Probably. This will give a YE 30/03/2012 EPS of 22.4 cents, and if you multiplied that by 10.7, you would get the $2.40 that the Donnelly report targets. Some will consider this to be optimistic, but it is not beyond the pale.

It would be useful to focus on the sort of EPS growth that is reasonable for TGA. Should it be 12%, 11%, 10% for the next three years, or something roughly similar like 10%, 9%, 8%. Should it be 8%, 8%, 8%, or 5%, 5%, 5%, or no growth? The YE 30/03/2012 annual report will be available soon, and when I have read it, I'll invent a growth scenario as part of my FA work on TGA. One can assume that dividends will be about half the EPS.

In summary, what are reasonable forward EPS estimates for TGA? If one invents a pessimistic scenario too, then to be conservative, onee can settle for the middle.

On points made in later posts about electronic items and things becoming so cheap as not to be worth renting, I think they may not understand the demographic who use TGA - substantially people on welfare. In the countryside, where TGA does particularly well, many customers are Aborigines with large families. 85% of the payments made are effected via Centrepay, and some units added to the basket of items rented are cheap. The word "renting" is misleading, effectively these are items bought via operational leases. What happens is that the customers have a certain capacity to service a fund-outflow stream from their welfare receipts. This capacity may suffice to pay for say $3K of value, so they get what they want, say a large washing machine, and then they top up to match the commitment that they can service. Many customers cannot accumulate funds to buy items, because relatives/friends will "borrow" the funds, so the operational lease option suits them well - they cannot even give the items to bludgers, because TGA owns them. A great deal of the business flows from reference selling - Aunty Bella gets in a new lounge suite, a new double bed and something else, and within days her sister-in-law is in line for the same deal. Visit an outlet, and listen to what the manager has to say.

Another demographic, although small, are landlords - they want the convenience of TGA ensuring things like washing machines and refrigerators remain operational. Yet another demographic are folk working away from home on contract - they simply do not want the hassle of disposing of the items when their contracts expire.

TGA is introducing new lines to replace those that become unprofitable - furniture is going ballistic, and the range is improving. Anyhow, let us see what the YE 30/03/2012 has to report, then decide if all is well, or not.

And yes, I would love to own a piece of this business, and to this end I regularly buy more shares (bought another 10,000 today). I now have 470,000 TGA shares.

 

[Klogg]

I now have 470,000 TGA shares.

Wow, impressive. VERY impressive

 

[Julia]

And yes, I would love to own a piece of this business, and to this end I regularly buy more shares (bought another 10,000 today). I now have 470,000 TGA shares.

Wow, impressive. VERY impressive

Or very risky.
That's a whack of funds in just one company, especially one in a clear downtrend.

 

[Nutmeg]

I believe that TGA is impacted by the cheap prices at which people can now buy TGA's stock outright, rather than going through a hire-purchase arrangement with TGA. So long as I can buy a TV at ridiculously low prices (compared to a few years ago) why would I go to TGA to buy it?

As a general observation this might be true but I'm not sure that there's much evidence to support it. For one thing, I don't believe that the forces that are presently keeping consumers away from HVN and JBH would operate on TGA's demographic any (or much) differently.

 

[Klogg]

Or very risky.
That's a whack of funds in just one company, especially one in a clear downtrend.

That's why I say it's impressive. It takes a lot of confidence to back yourself THAT much.

 

[Nutmeg]

Or very risky.
That's a whack of funds in just one company, especially one in a clear downtrend.

Many people have as much or more tied up in their homes. In western Sydney not a few are living in homes with negative equity. Personally, I think there is less risk, i.e. there is a greater margin of safety built into, buying TGA at current prices than there is buying a Sydney property at the moment. Yet many Australians have a false sense of comfort that you can't lose money on property.

 

[McLovin]

Many people have as much or more tied up in their homes. In western Sydney some are living in homes with negative equity. Personally, I think there is less risk, i.e. there is a greater margin of safety built into, buying TGA at current prices than there is buying a Sydney property at the moment. Yet many Australians have a false sense of comfort that you can't lose money on property.

That's ridiculous. For one thing plenty of companies go to zero. Land doesn't.

 

[odds-on]

Or very risky.
That's a whack of funds in just one company, especially one in a clear downtrend.

The amount of capital Pioupiou has put into TGA is more or less equivalent to what a property investor would use to purchase a property. Purchasing an investment property is one investment decision just like purchasing TGA is one investment decision. The upside and downside are different in each case and need to be evaluated properly for the investors timeframe and personal requirements. How can we say it is "risky"? It actually could be less "risky" than a property investment for Pioupiou's personal timeframe, skills and income requirements. Income, liquidity, valuation skills, exposure, potential upside, permananent loss of capital and so on need proper evaluation. I do not see any difference in allocating $500k to a property or $500k to shares one company - the amount of capital allocated is the same!

 

[craft]

For FA, the two most important factors required to be invented are the RRR and a growth factor to apply to EPS,.

Pioupiou.

In my humble opinion you have missed the most important factor. Profitability.

You can keep the two factors you mention set. Ie your required return fixed and the company can hit the growth rate expected and the value will still be smashed if the profitability falls.

The lower the profitability the more that must be retained to fund the growth resulting in less free cash flow from the investment. An investment is worth the PV of its future free cash flows.

 

[tech/a]

In my humble opinion you have missed the most important factor. Profitability

.

And I think all of those in this dog have missed another---DEMAND!

There isnt any!

 

[odds-on]

.

And I think all of those in this dog have missed another---DEMAND!

There isnt any!

The final year report will be most reliable source to gauge demand. It will be interesting to see the sales figures.

 

[Nutmeg]

That's ridiculous. For one thing plenty of companies go to zero. Land doesn't.

Clearly, you're confusing stock market cap with the liquidation value of a company. But you're also wrong on a basic level: residential property can go to $1 which is effectively zero. Don't believe me? Check out the price of residential properties in Detroit in the US: http://www.guardian.co.uk/business/2010/mar/02/detroit-homes-mortgage-foreclosures-80

The issue raised by Julia was the question of risk. You can't just talk in general terms about the value of "a company" potentially going to zero, as you put it. You need to identify and tie specific risks to specific companies and then weigh up the probabilities of those risks materialising. That's the context in which my remark about Australians' bias towards property as a safe investment was made.

Is the risk of permanent capital loss to people who bought McMansions out in Sydney's western suburbs pre-GFC that are presently in negative equity higher than the same risk of buying TGA at $1.40 a share? That's the question.

 

[Nutmeg]

.

And I think all of those in this dog have missed another---DEMAND!

There isnt any!

Demand for TGA's goods and services or demand for TGA's stock? On the first you're wrong. On the second, who cares?

 

[Klogg]

.

And I think all of those in this dog have missed another---DEMAND!

There isnt any!

You're right, short term there isn't any. But if I'm getting paid 7% FF to hold it, and the companies profits are growing, why do I care about demand right now?

 

[odds-on]

Clearly, you're confusing stock market cap with the liquidation value of a company. But you're also wrong on a basic level: residential property can go to $1 which is effectively zero. Don't believe me? Check out the price of residential properties in Detroit in the US: http://www.guardian.co.uk/business/2010/mar/02/detroit-homes-mortgage-foreclosures-80

The issue raised by Julia was the question of risk. You can't just talk in general terms about the value of "a company" potentially going to zero, as you put it. You need to identify and tie specific risks to specific companies and then weigh up the probabilities of those risks materialising. That's the context in which my remark about Australians' bias towards property as a safe investment was made.

Is the risk of permanent capital loss of people who bought McMansions out in Sydney's western suburbs pre-GFC that are presently in negative equity higher than the same risk of buying TGA at $1.40 a share? I'm inclined to say yes.

Great post Nutmeg. I am far from sophisticated in my investment approach but I can differentiate between past experience and future exposure.

I am often wrong (I am a married man) but only time will tell regarding TGA.