TGA - Thorn Group

[McLovin]

????

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. – an I wrong?

No you're right, I thought it referred to something on the cash flow statement. I'm feeling a little like death warmed up today, flu + food poisoning. Back to bed I go.

 

[kermit345]

I'm pretty poor at the whole TA thing but with today's price touching $1.525 am I correct that the downtrend is possibly broken if we can finish at $1.52 or higher on some decent volume (i.e. 1 million shares?)

 

[craft]

I'm pretty poor at the whole TA thing but with today's price touching $1.525 am I correct that the downtrend is possibly broken if we can finish at $1.52 or higher on some decent volume (i.e. 1 million shares?)

You reckon your bad - I thought we were just having a retracement in a long term uptrend. How dumb is that?

I guess time frame is everything. But if a trend is a higher low and a higher high, that occurred on a daily bar basis last Tuesday.

No doubt the goose will be along shortly to highlight to us the ‘right way’ (his way) to see things.

 

[tech/a]

You reckon your bad - I thought we were just having a retracement in a long term uptrend. How dumb is that?

I guess time frame is everything. But if a trend is a higher low and a higher high, that occurred on a daily bar basis last Tuesday.

No doubt the goose will be along shortly to highlight to us the ‘right way’ (his way) to see things.

Duck thats D-U-C-K

Looking for a strong break above $1.50.
So will see what the day brings.
Will do some analysis later.

 

[craft]

Duck thats D-U-C-K

Sorry Tech

I get my poultry confused.

 

[McCoy Pauley]

Interestingly, I've been going through some old reports for RRA (the predecessor to TGA). The acquisition of rental assets in the 2006/07 financial report was reported under the cash flows from operational activities in the statement of cash flows. Since that financial report, it's been shifted to cash flows from investing activities in the statement of cash flows.

I'm not clear as to why the move was made, but given the discussion on this issue over the past couple of pages, I thought it was interesting.

 

[kermit345]

TGA got a mention in last nights Eureka Report as a Buy so not sure if thats possibly what is sparking some of this additional buying today. Either way the price now up to $1.55 on decent-ish volume so if it can be sustained in my view its looking the goods.

And Craft you've managed to lighten my mood at work today so well done, having a little chuckle to myself. Would be interested in your perspective Tech/a, seems pretty clear cut to me but I could be wrong.

 

[tech/a]

Got filled at $1.54.(11.18 am)
There is little supply so price is rising freely.
The gap away was the strong clearance I wanted to see.
Im looking at $1.70ish before resistance.
A couple of technical pointers on the way.

 

[Julia]

TGA got a mention in last nights Eureka Report as a Buy so not sure if thats possibly what is sparking some of this additional buying today.

It was also nominated as a Buy in "The Australian" a few days ago.
If we're heading into a depression, it certainly seems like a winner.

 

[Klogg]

It was also nominated as a Buy in "The Australian" a few days ago.
If we're heading into a depression, it certainly seems like a winner.

To add to both The Australian and The Eureka report, it got another mention on Switzer recently (I don't remember the exact day, sorry) and Motley Fool share advisor.

For me, it's one of the most (if not THE most) obvious from an FA perspective.

 

[kermit345]

Klogg, need to review my filters for value stocks but given recent report etc it certainly does seem like one of the better FA stocks around. The following chart is what i've been looking at today and as you can see by the green circle today it basically gapped up above the $1.50 resistance and the downtrend channel. Seems like a good sign to me and by the sounds of it every newsletter out there is pumping it now too. Happy to hold.

 

[Ves]

You reckon your bad - I thought we were just having a retracement in a long term uptrend. How dumb is that?

I guess time frame is everything. But if a trend is a higher low and a higher high, that occurred on a daily bar basis last Tuesday.

No doubt the goose will be along shortly to highlight to us the ‘right way’ (his way) to see things.

I made a post about this a while back. No one bothered to confirm or deny the analysis, but it bounced off the 50% retracement with ease, and on high volume. Typical V-shaped retracement if you believe all that jargon.

 

[Ves]

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.

Hi craft,

Thanks very much - great post.

I believe after all the time I have spent over the last few days in stewing over the financial statements of the past six years, reading articles and essays about maintenance capex (good reading and learning exercise in itself) - I have come to the same conclusion that it is almost impossible to distinguish between maintenance capex and growth capex in this business in any meaningful way.

I can understand the cash flow in this business (at least better than the taxation accounting which is outside of my specialisation) and this is the major reason why I became interested in this business. It is obvious that they can fund growth capex from operating cash flow because the assets that they purchase and lease to people (if my rudimentary calculations are correct) are paid off and become "free carry" after year 1. You only need to go onto their website and compare the weekly rental payments to what JB Hifi are selling them at and make an allowance for a retailer's "profit margin" to see this. However, the problem in my mind when valuing this business was - how much is free cash flow? Clearly this has turned out to be very problematic. As you said, as long as impairment and bad debts remain low, this business is fairly low-risk going forward.

May I ask what valuation model you are using if not a DCF? (assuming that by not worrying about the cash flow you are not using a DCF)

edit: I was going to re-read Greenwald's chapter on WD-40 and try something similar on TGA as it has consistent reliable earnings and ROIC / ROE.

 

[craft]

Would be interested in your perspective.

A good company and anything below about $1.50 gives the purchase economics that I require. There was plenty of scope to get set following the capitulation in the value zone, having the financial report lob at accumulation price levels was great for confirming the assumptions, seems it underpinned a change in price action, looks like it could be on a bit of a 'turkey' run now.

 

[craft]

May I ask what valuation model you are using if not a DCF? (assuming that by not worrying about the cash flow you are not using a DCF)

I'm using my top secret SWAG model.

 

[Ves]

I'm using my top secret SWAG model.

What does SWAG stand for? I would say Secret Wives and Girlfriends model (pardon the pun) but we may be straying quickly off topic...

 

[craft]

What does SWAG stand for? I would say Secret Wives and Girlfriends model (pardon the pun) but we may be straying quickly off topic...

Scientific Wild **** Guessing. [another name for all valuation models.]

Anybody checked out the course of sales today?

 

[Ves]

Scientific Wild **** Guessing. [another name for all valuation models.]

Anybody checked out the course of sales today?

Tried a few different valuation methods now (obviously not trying to be super-reliant on their accuracy) - but getting similar valuations of around $1.80-1.90. With a margin of safety of around 20-25% buying at around today's price and under looks pretty good value to me.

 

[Pioupiou]

Tried a few different valuation methods now (obviously not trying to be super-reliant on their accuracy) - but getting similar valuations of around $1.80-1.90. With a margin of safety of around 20-25% buying at around today's price and under looks pretty good value to me.

Below is a cut and paste of something I am writing for myself.

Valuation

It does not matter how one values a stock, the quality of that stock is part of the consideration.

Although I have not long thought about it, I think the two-dimension grading of stocks along the line that Roger Montgomery grades them makes sense – one dimension being risk (quality of the cashflow and the balance sheet, perhaps) and the other being performance. The best companies would be A1 and the worst J10 if one had ten steps to each dimension. The number of dimensions was simply plucked out of the air to convey the concept. Roger's matrix ranges from A1 to C5, which is preferable. One can then guess what grading one would give TGA, and from there obtain your rule-of-thumb multiples.

You can allow factors like Market Capitalisation, Years of ASX History, ASX liquidity to influence your multiples. Thus although TGA scores better than WOW in a matrix that does not include these things, you may feel more comfortable giving WOW a higher PER, or a higher EBIT multiple. After all, if an institution like PPT wants to sell $20M TGA stocks, it will trash TGA's SP during the sell-down, which could take many months, but realising $20M by selling WOW would be a minor SP blip accomplished within a day or two.

For reasons that are contestable, I'll give TGA a score of A2 in my 2-dimensional matrix, and I'll add a third dimension of size. Because TGA is in the ASX 300, and its market capitalisation is about $220 million, I'll give it a size score of (iii). Thus I end up with a classification of A2(iii). An A2 is a high score, and were TGA a large liquid stock we could presume it would earn a PER of 16. If for the hell of it we reduce this by 10% if it were a (ii) size stock, and another 10% if it were a (iii) sized stock, then you would get 16 x .9 x .9 = 13, and hence you could give TGA a target value of 19c x 13 = $2.47.

You could add a market sentiment factor if you wanted to, 15% up in a bull market and 15% down in a bear market, and hence current negativity would suggest a PER of 16 x .9 x .9 x .85 = 11, and one ends up with a target SP of 19c x 11 = $2.09.

There is nothing intrinsic about these classifications, factors and resultant numbers – I have just sucked them out of my thumb to indicate that qualitative factors should have a bearing when one derives a target share price (SP) on fundamentals.

EBIT Multiple

Morning Star has TGA's EBIT for YE 30/03/2012 at $38.6M, and the shares outstanding as 146.4M, so a multiple of 6 would give a target SP of $1.58. A multiple of 8 gives $2.11.

Using Morning Star metrics SUL (Super Retail Group) has an EBIT of $87.55M, and 146.3M shares, so to get to its current share price of circa $7.20 implies an EBIT multiple of 12. CAB (Cabcharge) has an EBIT multiplier of 8.5. A multiple of 6 was mentioned in the prospectus for TGA's December 2006 float. I am not familiar with what the typical EBIT multiple is, so I'll write no more on it – 8 seems reasonable.

PER Multiple

The December 2006 float used a PER of 8 to arrive at the 6.25c x 8 = 50c float SP. I have used this as the bottom-rung PER. The historical performance metrics and the many qualitative factors suggest a higher PER is reasonable, reduced a bit to reflect TGA's capitalisation and share trading liquidity. Relative to what worse performers of similar or lower capitalisation and liquidity command, the PER could easily be 13. Look at the facts, examine alternative stocks, and take your pick of a PER that seems reasonable. With a diluted EPS of 19c, you will get:

Target PER - Target SP - Target PER - Target SP - Target PER - Target SP
- - - 8 - - - - - $1.52 - - - - - 11 - - - - - $2.09 - - - - - 14 - - - - - $2.66
- - - 9 - - - - - $1.71 - - - - - 12 - - - - - $2.28 - - - - - 15 - - - - - $2.85
- - 10 - - - - - $1.90 - - - - - 13 - - - - - $2.47 - - - - - 16 - - - - - $3.04

Another way of looking at the same thing is via risk adjusted required rates of return (RRR) adjusted for growth. They are merely 1/PER, and hence a RRR of 12.5% would render a PER of 8.

ROE based multiple of Equity per Share

If you accepted that the ROE was about 23.5%, and if your RRR were 12.5%, then 23.5/12.5 gives you a multiple of 1.88, which you can uplift a bit on the basis that half the earnings are being well invested within TGA – so let's say a multiple of 2. The equity per share is about $140.211M/ 144.7223M = roughly $1.00. Consequently we get about $2.00.

Conclusion

Work out TGA's fair-value SP, or target SP, or whatever you call it, in your own way, and it would probably work out between $1.50 and $2.00 for many investors. Numbers between $2.00 and $2.50 are not silly in my view, it is just a question of when. Also, the price at which investors buy is not the same as the one at which they will sell.

A fair-value of $2.00 does not suggest one should buy TGA at $2.00 and below. If, in addition, you want a 25% margin of safety, you might set your limit at $2.00 x .75 = $1.50.

It is easy to justify a low SP. If you insisted on a RRR of 15%, then you would get a PER of 1/15%, and if you wanted a 25% margin of safety, you would get 19c x 1/.15 * .75 = 95c.

Now you know why I dislike the words Intrinsic Value, and I am not too enthusiastic about the "Fundamental" in FA. There is nothing intrinsic or fundamental about these postulated share prices – they are highly subjective.

If you can invest in something as good as TGA, or better, at say $1 a share, then you should not value TGA higher than $1.

I found in life that the midpoint often gives a reasonable approximation. Hence if one has two extremes of 95c and $3.04 - the average of $2.00 may be reasonable as a target value. My own target value is about $2.30, but then I am biased. When the SP gets to $2.00, I'll start focusing on an exit price, and make up my mind then. That ($2.30) is where I wanted to sell some TGA in early 2011, but failed to get that price.

 

[Tightwad]

I was stuck trying to think of what SWAG was.. I was thinking along the lines of SWOT.. Strenghts Weaknesses Opportunities and Threats