TGA - Thorn Group

[craft]

You make it sound surprising.

I'm not surprised - just went to the effort because some people seem to believe his assertions over figures.

Craft
Your like a polititian
Designing arguments to suit your view.

If your never going to sell your holding you won't ever be taxed.
Add a tax component as your valuing the holdings TODAY.
You won't avoid tax.

Craft.
How on earth does any holder of any stock make a profit WITHOUT A TREND?---up.

Carry on

Add in a provision for deferred tax and Buy & Hold is still in front. That provision is a tax free loan from the government that is producing income for us – sweet.

ps

I'm not a politician, just a full time investor who prefers facts and figures over assumptions and assertions.

You can be sure I will carry on!

 

[craft]

Perhaps it would be possible to determine how many new rental assets they need to purchase just to maintain current NPAT or revenue (and call this capex) and the balance will be included as new investment? Any thoughts? I feel that interpretation of this facet of their business is essential in arriving at a valuation.

This is the right line of thought. Funding growth internally is one option of how to use free cash flow. The FCFF should be calculated on maintaining existing business levels.

 

[Ves]

Craft.
How on earth does any holder of any stock make a profit WITHOUT A TREND?---up.

For someone who professes to own a business (or was it multiple businesses) you simply have no imagination or real understanding. Do you have to sell your own business to make a profit? You seem to confused (perhaps deluded is a better way of putting it) by the fact that the underlying business has a secondary market in which pieces of paper (shares) can be traded for fractional ownership of said business. You seem to be insinuating (constantly, tediously, stupidly) that you can only make a profit by trading these instruments like bits of paper estranged from their underlying reality.

TGA listed for $0.50 a share in 2006. Since then it has paid almost half of this to investors in highly tax effective fully franked dividends. This last twelve months alone you would have received 20% of your initial outlay back. Come back and have a look in another 3-5 years. I can almost gaurantee that you will be in front without even considering the share price.

Over the long term cash flow from dividends makes up a massive proportion of the overall return of a share market investment.

It is utter lunacy to suggest that the only way to make money in the share market is from capital gains receipts.

Quite honestly you are not helping anyone in this thread. All you are doing is constantly derailing the discussion, and honestly when it buries any constructive discussion that I have been trying to have with other fellow investors I start getting pissed off. Your behaviour, for someone who cried foul and metaphorically threw his toys out of the cot (even when he was given his own "special purpose locked thread" which only he could post in) when people disagreed with his views is quite honestly hypocrisy to the nth degree. I do no think I am the only one who is truly sick of it.

 

[Ves]

This is the right line of thought. Funding growth internally is one option of how to use free cash flow. The FCFF should be calculated on maintaining existing business levels.

Thanks craft - I am determed to find the answer to this and thought about this for most of yesterday. Still haven't come up with anything I deem reasonable, but I hope the "ah-hah" moment is just around the corner.

 

[tech/a]

Add in a provision for deferred tax and Buy & Hold is still in front.

For a number cruncher you dont crunch that many numbers.

I'm in TGA around 50% less time than you are for similar return.
So for time in the market it kills buy and hold.
You have no regard for opportunity cost.
Your not considering VaR and in return or Risk adjusted return on capital.

As I said selective argument.

For someone who professes to own a business (or was it multiple businesses) you simply have no imagination or real understanding. Do you have to sell your own business to make a profit? You seem to confused (perhaps deluded is a better way of putting it) by the fact that the underlying business has a secondary market in which pieces of paper (shares) can be traded for fractional ownership of said business. You seem to be insinuating (constantly, tediously, stupidly) that you can only make a profit by trading these instruments like bits of paper estranged from their underlying reality.

Sure you can trade them profitably PROVIDED the participants investing in the share---in this case TGA--agree with it being undervalued and chase the bargain.

Im not seeing that even with a 30% increase in profit.
Im seeing Funds and directors bail out--strange that.
Who's delusional in their valuation.
The fund?
The directors?

It is utter lunacy to suggest that the only way to make money in the share market is from capital gains receipts.

I see
How would you say money is lost then in the markets?
Surely not capital losses???

Quite honestly you are not helping anyone in this thread. All you are doing is constantly derailing the discussion, and honestly when it buries any constructive discussion that I have been trying to have with other fellow investors I start getting pissed off. Your behaviour, for someone who cried foul and metaphorically threw his toys out of the cot (even when he was given his own "special purpose locked thread" which only he could post in) when people disagreed with his views is quite honestly hypocrisy to the nth degree. I do no think I am the only one who is truly sick of it.

Have you talked with everyone in this thread?
Is it YOUR thread?
I'm not burying anything.
In fact I'm offering food for thought which I'm sure has hit an accord with those who may have never considered it.
What your sick of is my replies to your and others posts.
If Id only go away you'd be free to preach your doctrine.

Sorry TGA can be traded with less risk and more profit.
You wont have to sit in it infinitum and you wont have to put capital at unlimited risk.

Carry on.

 

[McLovin]

Thanks craft - I am determed to find the answer to this and thought about this for most of yesterday. Still haven't come up with anything I deem reasonable, but I hope the "ah-hah" moment is just around the corner.

Have you seen Greenwald's method for estimating CAPEX? It's what I usually use. It's pretty well detailed in his book Value Investing

http://www.oldschoolvalue.com/blog/valuation-methods/calculating-maintenance-capital-expenditure/

 

[Ves]

Have you seen Greenwald's method for estimating CAPEX? It's what I usually use. It's pretty well detailed in his book Value Investing

http://www.oldschoolvalue.com/blog/valuation-methods/calculating-maintenance-capital-expenditure/

Ah, thanks. I have that book, I really need to re-read those sections now that I have more experience under my belt. Perhaps the light bulb moment is in there somewhere.

 

[Ves]

For a number cruncher you dont crunch that many numbers.

I'm in TGA around 50% less time than you are for similar return.
So for time in the market it kills buy and hold.
You have no regard for opportunity cost.
Your not considering VaR and in return or Risk adjusted return on capital.

As I said selective argument.

Opportunity cost in craft's post is represented by interest calcs. Unless you are going to discount it at another rate, but since we do not know the CAGR of this system it would be pretty hard to with the limited information that you have provided thus far, no?

There is also the possibility, like all trend following systems, that you could have been whip-sawed out of more positions, and the winners were cut-short too often (or even losers were incurred). The return on TGA could be much higher in a lot of cases. Opportunity cost is a double-edged sword. You seem to be failing to acknowledge that.

Sure you can trade them profitably PROVIDED the participants investing in the share---in this case TGA--agree with it being undervalued and chase the bargain.

Im not seeing that even with a 30% increase in profit.
Im seeing Funds and directors bail out--strange that.
Who's delusional in their valuation.
The fund?
The directors?

Most market participants take a short to medium term view (ie. no more than two years). TGA is approaching / has entered the less profitable part of the cycle in my view (I also do not think that this is structural like other retailers). Therefore, the share price may well be depressed for some time to come. The current price action certainly does not surprise me in the least.

I see
How would you say money is lost then in the markets?
Surely not capital losses???

Is this not the same as any other system?

In fact I'm offering food for thought which I'm sure has hit an accord with those who may have never considered it.

Would you not get a larger audience in a thread solely directed at discussing the merits of your chosen discipline rather than doctrinising (your words, not mine) in a specific company thread?

Sorry TGA can be traded with less risk and more profit.

I think this is hindsight speaking, quite honestly. Go try this strategy on some other charts. It only works in limited cases. I am fairly sure it is similar to the much loved Weinstein model which when backtested often comes out negative, and well behind the market in most years over the last two decades. Trend following systems have weaknesses. In choppy, volatile markets the whipsaw nature of the price action causes a lot of entries, exits, re-entries and so on. Small losses and transactional costs can quickly add up. I have often found through looking at some of these systems that people post that technical indicators that people implement get over-ridden by the market, causing the trade to be stopped out only for the price to take off and the largest, most profitable part of the move is missed. Not to mention that moving-average lines are lagging indicators. They don't give you an edge. You're also paying the government far more regularly if on chance you are actually profitable.

Technical systems are often profitable in certain scenarios and hopelessly unprofitable in many others. Indicators often provide more in the way of confirmation bias than they do actual results. Why do your posts in this thread completely ignore systematic risk?

The psychological risks are also no less than a long-term value investing approach. Whilst a 25% drawdown on a single stock can be quarantined, try facing it on your whole "portfolio" or "system." Most people give up if their trading system has an extended run of losers, no matter how many are only due to whipsaw price action.

You wont have to sit in it infinitum and you wont have to put capital at unlimited risk.

This statement is false. Risk is not unlimited. Unlimited risk would come from leverage or short-positions.

In short, anyone can put entries and exits on a chart to find the most profitable way to trade it. In theory it is easy, in practice it is rarely the same.

 

[McLovin]

Im not seeing that even with a 30% increase in profit.
Im seeing Funds and directors bail out--strange that.
Who's delusional in their valuation.
The fund?
The directors?

Directors have been buying not selling. One fund is selling out, one fund has been buying.

Of course let's not let the truth get in the way of a good story.

 

[Ves]

Have you seen Greenwald's method for estimating CAPEX? It's what I usually use. It's pretty well detailed in his book Value Investing

http://www.oldschoolvalue.com/blog/valuation-methods/calculating-maintenance-capital-expenditure/

I'm getting an average of about 29-30% for the last six years if you average the PPE & Rental Assets using opening and closing balances (at listed cost on the balance sheet).

ie for 2012 (48,748 + 41,178)/2 divided by 157,817 = 28.49%

Which means for $158 million of rental sales for 2012 they need to spend $46 mil in maintainenance capex to maintain this level of sales.

Any one willing to share their view on this?

Operating Cash flow was $59 mil.
Maintenance capex as above $46 mil
Less working capital rqd $5 mil (average of last 5 years)

Gives me free cash flow to firm of $8 mil.

It doesn't look correct to me. Feel like I am missing something, any thoughts or corrections would be greatly appreciated.

edit: If I use total revenue $188 mil & add in the debt ledgers of $6 mil to the figures above I get PPE / sales of 25% for 2012. But, this brings the maintenance capex up to $54 mil. I'm awfully confused

 

[McLovin]

I think the issue you may be running into is that "Acquisition of rental assets" is a line item for operating leases but the acquisition of goods sold under finance leases is included in OCF. That would make sense since the accounting for a finance lease is to recognise the fair value of the good sold as revenue and create a receiveable with a contra asset account for the PV of the unearned interest revenue. So in a sense, there is CAPEX being included in OCF.

That really opens a whole new can of worms.

 

[craft]

I'm getting an average of about 29-30% for the last six years if you average the PPE & Rental Assets using opening and closing balances (at listed cost on the balance sheet).

ie for 2012 (48,748 + 41,178)/2 divided by 157,817 = 28.49%

Which means for $158 million of rental sales for 2012 they need to spend $46 mil in maintainenance capex to maintain this level of sales.

Any one willing to share their view on this?

Operating Cash flow was $59 mil.
Maintenance capex as above $46 mil
Less working capital rqd $5 mil (average of last 5 years)

Gives me free cash flow to firm of $8 mil.

It doesn't look correct to me. Feel like I am missing something, any thoughts or corrections would be greatly appreciated.

edit: If I use total revenue $188 mil & add in the debt ledgers of $6 mil to the figures above I get PPE / sales of 25% for 2012. But, this brings the maintenance capex up to $54 mil. I'm awfully confused

Only inventory for operational leases goes through PPE cash flows. Changes in Financial leases, Cash First and Equipment Finance won’t show up. The latter two are being ramped up so it is significant. Greenwald’s method will miss this ramp-up.

I’ll leave you to dig for a while yet.

 

[Pioupiou]

. . . Which means for $158 million of rental sales for 2012 they need to spend $46 mil in maintainenance capex to maintain this level of sales. . . .

In relation to the specific issue of the CAPEX required for rental revenue (not sales), the annual report has the following for YE 30/3/12 and YE 30/3/11.

Operating leases - - - - - - - - - 93,562K - - - 83,098K
Acquisition of rental assets - - (54,834K) - - (52,646K)

The main rental (mainly rent-to-buy) business is sound, and from a gross margin perspective, it is improving due to better procurement. It is also improving for a negative reason - new customer numbers (and hence business) slowed relative to the past few years.

The Finance Lease business follows different accounting rules (for one, interest is split into a separate income stream). Its gross figures are given as:

Finance lease sales - - - - - - - - - 33,826K - - - 37,440K
Finance lease cost of sales - - - - (22,255K) - - (26,641K)

Rental income plus sales income for 2012 was thus $93,562K + $33,826K = $127,838K, and during the year $54,834K + $22,255K = $77,089K was spent buying items to support these two lines of business.

There are other revenue streams - Interest $39,635K, Collection revenue $16,013K, PDL revenue $5,115K and Other income $200K.

TGA is shifting towards more operating leases, so the current ratios between the two will not hold for the future, and the "interest" component of finance leases will decline. Philosophically, one could split rental income into two streams, ascribing interest to one of them and product profit to the other.

I did not attempt to nut out what it was that interested you - I merely attempted to clarify one sentence.

Except for the NCML adventure, TGA keeps just under half its after-tax income to fund expansion, and this has allowed TGA to expand and retain a solid balance sheet, hence I have not concerned myself much with free cash analysis. Putting rental assets into CAPEX may be misleading, because it is conceptually fairly close to "inventory", which typically is not regarded as CAPEX. Also, the rental assets are recorded at cost less depreciation - a much lower cost than the NPV of their associated rental contracts, which is an additional layer of financial conservatism.

 

[Ves]

Thanks guys, much to my dismay I woke up at 3am and realised I had forgotten about the two different types of leases and their accounting treatment. Looks like I still have a bit of problem solving after work tonight!

 

[VSntchr]

Closed at $1.50 today.
Another up day tomorrow and we could have a whole lot of tech analysts on board :

 

[Ves]

Only inventory for operational leases goes through PPE cash flows. Changes in Financial leases, Cash First and Equipment Finance won’t show up. The la tter two are being ramped up so it is significant. Greenwald’s method will miss this ramp-up.

I’ll leave you to dig for a while yet.

Am I missing something obvious? Been thinking about this all day much to the detriment of my work productivity! Still no closer to an answer. The unknown useful life of the assets and its constantly moving nature is as mclovin said a can of worms indeed. Using depreciation as an est of mcx doesnt look accurate either.

 

[Ves]

I think the issue you may be running into is that "Acquisition of rental assets" is a line item for operating leases but the acquisition of goods sold under finance leases is included in OCF. That would make sense since the accounting for a finance lease is to recognise the fair value of the good sold as revenue and create a receiveable with a contra asset account for the PV of the unearned interest revenue. So in a sense, there is CAPEX being included in OCF.

That really opens a whole new can of worms.

Do you think this is what they mean by "disposal of rental assets" in note 27 on page 67? Before working capital adjustments the operating cash flow is $78 mil according to that page.

 

[McLovin]

Do you think this is what they mean by "disposal of rental assets" in note 27 on page 67? Before working capital adjustments the operating cash flow is $78 mil according to that page.

Nah that's just them selling old TV's once they can be no longer rented out.

You may find it impossible to ever get an accurate fix on capex. A lot of financial type companies fall into that category (banks and insurance especially).

Maybe craft has some suggestions?

 

[craft]

Am I missing something obvious? Been thinking about this all day much to the detriment of my work productivity! Still no closer to an answer. The unknown useful life of the assets and its constantly moving nature is as mclovin said a can of worms indeed. Using depreciation as an est of mcx doesnt look accurate either.

Hi V
You are the professionally trained accountant and I am the self taught backyard hack investor – It may be wise to ignore all the following on that basis.

Cash First and TEF growth are being financed out of operational cash flow, PDLs present more complexities.

The disposal of rental assets you mention in note 27 picks up the non cash nature of expensing PPE to finance lease cost of sales. The accounting treatment of financial leases means you have pre-recognition (as compared to operational leases) of 60 Million in revenue. You have also created 43Million in collateral which is basically off balance sheet PPE which has been pre-expensed earlier in line with the revenue recognition. (see the impacts in Note 11 on deferred tax)

All in all I think it is too difficult to use cash flow at the accounts level and separate it into maintenance and growth components. But in TGA’s case that doesn’t really matter because:

The PPE is short lived – the difference between economic replacement and depreciation is immaterial. Apart from timing differences which don’t concern us the only thing that will cause a difference between accounting profit and cash for PPE is if they get the impairment charges wrong.

Credit control and impairment is critical for TGA and it is better tracked through ratio’s like EBIT/funds employed then trying to see it through discrepancies in the cash flows.

The ratio’s in my assessment are tracking fine and the transaction with owners at an equity level indicate that dividends and growth to date have been funded by the cash from the business. Owners only had to stump up more capital for the NCML acquisition and debt has not increased significantly.

The other differences between cash and accounting profit is the amortisation of customer contracts which is favourable for cash and straight forward; and the change in fair value of PDL’s which is negative to cash and potentially the most rubbery number in my view.

Personally I’m not fussed about cash flow with TGA, the Balance Sheet is strong as. But I am very focused on provision and impairment levels and their asset efficiency ratios for early detection of possible problems.

 

[craft]

Nah that's just them selling old TV's once they can be no longer rented out.

????

Only a small part of it (ie the difference between cash received and the WDV) most of it is to do with transferring PPE to cost of financial lease sales. which is basically an early depreciation of the PPE to the eventual sale price of $1 under the financial lease.

Unless of course I’m wrong. – am I wrong?