TGA - Thorn Group

[Pioupiou]

My SMSF says that its SKI craps all over your TGA and guess what, the price (realtime actual value) is going up - scary eh !!!!!

Are we back on this sterile topic of chartists versus fundamental analysts. I am not a trader, nor a speculator, nor a necromancer - I am an investor looking for undervalued stocks. If a stock is well appreciated, then its upside is priced in, and hence it is not what I want, which is an undervalued stock. At about the same price with half the earnings per share, SKI is probably fully priced, so it is unlikely to become a candidate stock for me. I had a quick look at SKI, and normally I would look no further, because I like a stock to have:

* Debt/equity of no more than 35% – SKI is double that.
* Return on equity greater than 15% – SKI is about 10%, and that in spite of using much debt.
* Dividend covered by earnings – SKI has run for years paying more dividends than it earned.
* Growing cash flows – SKI has fairly flat cash flow per share

I was interested to see SKI's EPS growing nicely, if erratically. TGA has grown EPS at about the same pace, but one has to correct the Morning Star figure for 2007 to see that, which I did (5.1c).

As I wrote, the SPs are about the same – circa $1.50. However, TGA has a lower PER, which means one gets more earnings per buck from TGA. Dividend yield is similar, except TGA's is fully franked, and SKI's is unfranked, so TGA's is a better yield and covered by an EPS twice the dividend, so it does not have the Ponzi whiff about it that SKI has. SKI has a larger capitalisation and more liquidity, so it deserves a PER premium relative to TGA, other things being equal, which they are not.

Analysts have assumed that SKI is going to grow better than TGA, and therein lies the contention – nobody knows if bullish predictions for SKI and bearish ones for TGA are going to eventuate, and chartists don't care. Maybe SKI is the better investment, but I have not seen anything to support that.

Obviously, a quick glimpse at SKI does not equip me to dismiss it as substandard, especially because having an ingrained prejudice against utilities, which are subject to political interference, I have never thought much about regulated utilities. I'll look at SKI again in the near future.

SKI's financial year ends on 31 December. Here are a few Morning Star metrics, followed by those for TGA:

Return on capital (%) - - - 6 - - - - - - 7 - - -- - 7 - - - - - 10 - - - - - 9 - - - - - 9
Return on Equity (%) - -- 4.3 - - - - 5.6 - - - - 8.8 - - - - 14.1 - -- - 5.6 - - - 10.0
Long term debt (m) --1,655.1 - 1,455.7 - 1,655.1 - - 1,456.8 - -- 958.6 - - 919.7
S/holders Equity (m) - 607.9 - - 663.5 - - -390.7 - - -- 576.2 - 1,398.3 - 1,333.8
Cash Flow (cents) - - - - - 9.9 - - - 11.6 - - - 10.1 - - - - 14.0 - - - -12.3 - - 14.2
Earnings (cents) - - - - - - 2.4 - - - - 3.4 - -- - 3.2 - - - - - 7.6 - - - - 7.2 - - - 10.1
Dividends (cents) - - - - - 1.5 - - - - 4.2 - - - - 4.6 - - - - 12.8 - - - 13.5 - - - 10.0
Franking (%) - - - - - - -- - Nil - - - - Nil - - - - Nil - - - - - Nil - - - - Nil - - -- Nil
Payout Ratio (%) - - - -- - 62 - - - - 122 - - -- 144 - - - - 169 - - - - 189 - - - - 99

There was obviously a huge capital injection in 2010 that depressed SKI's SP then. TGA's financial year ends on 30 March. Here are its Morning Star metrics:

Return on capital (%) - - - 13 - - - - 18 - - - - 17 - - - - - 24 - - - - 17 - - - - - 19
Return on Equity (%) - - 12.0 - - - 17.5 - - - 17.8 - -- - 23.8 - - - 23.2 - - - - 19.9
Long term debt (m) - - - - 8.0 - - - - 0.0 - - -- 6.0 - -- - 0.0 - -- - 36.0 - - -- 14.0
S/holders Equity (m) - -- 54.4 - - - 62.3 - - - 69.3 - - - 81.8 - - - -95.0 - - - 140.2
Payout Ratio (%) - - - - - -- 8 - - - - 51 - - - - 50 - - - - 42 - - - - - 50 - - - - - 50
Earnings (cents) - - - - - - 5.1 - - - - 8.3 - -- - 9.4 - - - 14.9 - - -- 16.7 - - - 19.0
Dividends (cents) - - - - - 1.0 - - - - 4.2 - - - - 4.7 - - - - 6.2 - - - - 8.4 - - - - 9.5
Franking (%) - - - - - - - - Nil - - - - 100 - - -- 100 - -- - 100 - -- - 100 - - - - 100
Payout Ratio (%) - - - - - - 8 - - - - - 51 - - - - 50 - - - -- 42 - - -- - 50 -- - - - 50

On balance, TGA has a nicer set of numbers.

 

[Pioupiou]

I actually like this company while not holding. But this statement above is ridiculous, you can't be serious?

I am very serious. Obviously, more than one stock worth looking would be better than only one. I want stocks with low debt; high ROE; good EPS growth, preferably organic growth; good dividends supported by roughly twice as much EPS, and fully franked if it is substantially an Australian operation. I would prefer a market capitalisation above $200M. An ASX turnover about on par wth TGA (some $750K a trading day). There are other things that I like, for instance a business that is relatively free of trade union depredations, share-holder friendly management, etc. Lastly, and this is important, the stock should be underpriced.

Please send me your list, and even one stock would be better than none.

 

[Gundini]

I can do that, but in no way am I discrediting your stock. In fact, I realise you do hold quite a bit of TGA for many years. I found a post back in 2009 where you had a quarter of a million of these shares @ around $1.90 or so and were hoping for them to get to $2.50. The dividends over the years would have kept you in good stead. Do you still hold the Gordon and Slater stock? They seem to have come off a bit since you were talking about them but I'm sure they are doing fine today.

With regard to your request I say... DYOR... and preferably organic growth hahaha that is funny, but I will do my best!

 

[Boggo]

Are we back on this sterile topic of chartists versus fundamental analysts. I am not a trader, nor a speculator, nor a necromancer

On balance, TGA has a nicer set of numbers.

A sciolist perhaps ?

On the subject of numbers, since last January ( SKI vs TGA) there is only one set of numbers that appeal to me and they are the ones that affect my balance, I am not the least bit interested in what appeals to management or you amateur wannabe sages of Omaha.
Are you here to make money or spend weeks raving on about a stock that hasn't made you a cent in the same period of time.

When it does eventually up and then run out of steam I will thank you guys for being there

 

[Gundini]

I am very serious. Obviously, more than one stock worth looking would be better than only one. I want stocks with low debt; high ROE; good EPS growth, preferably organic growth; good dividends supported by roughly twice as much EPS, and fully franked if it is substantially an Australian operation. I would prefer a market capitalisation above $200M. An ASX turnover about on par wth TGA (some $750K a trading day). There are other things that I like, for instance a business that is relatively free of trade union depredations, share-holder friendly management, etc. Lastly, and this is important, the stock should be underpriced.

Please send me your list, and even one stock would be better than none.

I'm sure I could tailor the answer to fit the question as you have done here, but for the point of the exercise here is one, dyor to find the others of which are quite plentiful:

LYL Lycopodium

Double digit growth over 5 years in Sales, Cashflow, Earnings, Dividends, and Book Value, 3% Debt, Market cap $246Million, and 6% Dividend yeild. http://www.lycopodium.com.au/

With regard to these stocks being "underpriced", if a stock has these growth parameters they are all underpriced- doesn't mean the share price increases in any particular time frame.

There are others that I would not put here as they may derail the topic of this thread. Cheers

 

[oldblue]

I am very serious. Obviously, more than one stock worth looking would be better than only one. I want stocks with low debt; high ROE; good EPS growth, preferably organic growth; good dividends supported by roughly twice as much EPS, and fully franked if it is substantially an Australian operation. I would prefer a market capitalisation above $200M. An ASX turnover about on par wth TGA (some $750K a trading day). There are other things that I like, for instance a business that is relatively free of trade union depredations, share-holder friendly management, etc. Lastly, and this is important, the stock should be underpriced.

Please send me your list, and even one stock would be better than none.

And also not wishing to clutter the TGA thread, Pioupiou, but did you have a look at CPB as I suggested a couple of weeks ago? Much better value now the market has wiped a bit of froth off some shareprices!

Reply comment on the CPB thread perhaps, if appropriate.

Cheers

 

[Pioupiou]

I can do that, but in no way am I discrediting your stock. In fact, I realise you do hold quite a bit of TGA for many years. I found a post back in 2009 where you had a quarter of a million of these shares @ around $1.90 or so and were hoping for them to get to $2.50. The dividends over the years would have kept you in good stead. Do you still hold the Gordon and Slater stock? They seem to have come off a bit since you were talking about them but I'm sure they are doing fine today.

With regard to your request I say... DYOR... and preferably organic growth hahaha that is funny, but I will do my best!

I still hold SGH. I bought at $1.68 in late 2010, and was thinking of skipping out at circa $2.40 in 2011, but while I dithered over the exact exit price, the SP reversed, and I still hold those shares. A similar thing happened with TGA, I wanted to exit some at $2.30, and after touching that price for a part of a day, it retreated, so my sell orders were never executed.

I like SGH for the reason that I like TGA – it is is not cyclical, and it is a grubby business. SGH's history for expanding via acquisitions is less appealing, plus it is much more illiquid than TGA (I checked a few minutes ago, and at about 2:50PM, only two transactions had occurred). SGH's management have said that they are going to tone down acquisitions and focus on consolidation and organic growth, so in the hope that they will do that, I hold. As an aside, when PPT was selling TGA, it was buying SGH, which may have helped push SGH's SP up a few months ago. If I held neither stock, and had to choose one, I would select TGA, which is why I have kept on buying TGA for my personal portfolio until a few weeks ago, rather than adding to my SGH holding.

I have 18,000 SGH in my personal portfolio, worth roughly the price I paid, and I have 493,000 TGA spread over two portfolios, SMSF and personal. The SMSF's TGA holding enjoys a paper capital gain of $125K and the larger personal portfolio's gain stands at about $20K. SGH pays a slimmer dividend about a third of EPS). TGA's payout ratio is about 50%, and its dividend alone suffices to earn me a living. If I could find another TGA, in the interest of diversity I would sell some TGA and invest the proceeds in the on-par alternative. Analysts are predicting a large EPS increase for SGH in 2013 and 2014. I should give it more thought than I do.

 

[Pioupiou]

I'm sure I could tailor the answer to fit the question as you have done here, but for the point of the exercise here is one, dyor to find the others of which are quite plentiful:

LYL Lycopodium

Double digit growth over 5 years in Sales, Cashflow, Earnings, Dividends, and Book Value, 3% Debt, Market cap $246Million, and 6% Dividend yeild. http://www.lycopodium.com.au/

With regard to these stocks being "underpriced", if a stock has these growth parameters they are all underpriced- doesn't mean the share price increases in any particular time frame.

There are others that I would not put here as they may derail the topic of this thread. Cheers

Thanks for that - I'll add LYL to my do-more-homework list. I have considered LYL over the years since 2007. I tend to buy stocks one at a time, and each time LYL was on the short list, some alternative like Monadelphous, Cardno or Fleetwood has pipped it. I have been in and exited Fleetwood, Monadelphous and Cardno - each at a profit. Right now I am wary of mining and mining service companies, but not to the point of simply slamming down the shutters. Non-cyclical business is what I like these days.

 

[ENP]

I am very serious. Obviously, more than one stock worth looking would be better than only one. I want stocks with low debt; high ROE; good EPS growth, preferably organic growth; good dividends supported by roughly twice as much EPS, and fully franked if it is substantially an Australian operation. I would prefer a market capitalisation above $200M. An ASX turnover about on par wth TGA (some $750K a trading day). There are other things that I like, for instance a business that is relatively free of trade union depredations, share-holder friendly management, etc. Lastly, and this is important, the stock should be underpriced.

Please send me your list, and even one stock would be better than none.

ARP
BKL
CCL
CCP
CTD
EMB
FGE
FWD
LYL
MMS
MND
NVT
ONT
ORL
RHC
SUL
TGA

That's my watchlist. Most of them make your criteria (not taking into account the share price but the businesses themselves).

 

[Pioupiou]

ARP, BKL, CCL, CCP, CTD, EMB, FGE, FWD, LYL, MMS, MND, NVT, ONT, ORL, RHC, SUL, TGA

That's my watchlist. Most of them make your criteria (not taking into account the share price but the businesses themselves).

Thanks for that. Off the top of my head it looks like a list that is well worth working through.

On the matter of micro caps - personally I rather like them, but I have too many stocks at the small end, so I was looking for stocks that at least made the ASX300, particularly as I want to start my portfolio overhaul with my SMSF portfolio, where I am more conservative. My personal portfolio is what I call the playpen, where I am happy to take risks. It is now massively biased in favour of TGA, which does not bother me, but if a good candidate leads to better diversity, then shifting the balance away from TGA is a no-brainer.

PS for Oldblue. I did look at CPB, and although a good stock, it is perhaps priced as such. I'll send you a more detailed answer when I have had a chance to re-examine it. I have over the years often run my eye over CPB, because it is a solid business of the type that I like. Alas, it may not be that desert flower wasting its sweetness on the desert air, as the poet Gray may have worded it.

 

[VSntchr]

Thanks for that. Off the top of my head it looks like a list that is well worth working through.

On the matter of micro caps - personally I rather like them, but I have too many stocks at the small end, so I was looking for stocks that at least made the ASX300, particularly as I want to start my portfolio overhaul with my SMSF portfolio, where I am more conservative. My personal portfolio is what I call the playpen, where I am happy to take risks. It is now massively biased in favour of TGA, which does not bother me, but if a good candidate leads to better diversity, then shifting the balance away from TGA is a no-brainer.

PS for Oldblue. I did look at CPB, and although a good stock, it is perhaps priced as such. I'll send you a more detailed answer when I have had a chance to re-examine it. I have over the years often run my eye over CPB, because it is a solid business of the type that I like. Alas, it may not be that desert flower wasting its sweetness on the desert air, as the poet Gray may have worded it.

XRF is comparable to certain lines within CPB...and is cheap. Not a bargain...but not expensive by any means. Maybe worth a look at this one too...

 

[tech/a]

TGA

Still dead in the water technically.
Taking the small loss was wise in hindsite.

 

[ENP]

Why is TGA still valued at 7.3 P/E ?

I cannot understand, that after the last annual report, that the price has not risen above the low 1.40s. Where as before the annual report release was trading around 1.80 in March.

Did the 20-30% increase in TGA's business profit, earnings, etc not meet peoples expectations?

 

[VSntchr]

Why is TGA still valued at 7.3 P/E ?

I cannot understand, that after the last annual report, that the price has not risen above the low 1.40s. Where as before the annual report release was trading around 1.80 in March.

Did the 20-30% increase in TGA's business profit, earnings, etc not meet peoples expectations?

Its the slowing growth in TGA's core revenue stream that is causing the concern. Whilst some feel that the price reaction is overdone, others believe that the next few years will offer nil to negative growth. TGA did alot of business thru the GFC years and with a retention rate of only ~45% they will need to write a whole lot more business to cover these contracts as they expire.

The yield of over 7% should compensate investors for a year or two of slow growth, assuming that TGA can have their new initiatives performing well in a couple of years...

 

[Klogg]

Its the slowing growth in TGA's core revenue stream that is causing the concern. Whilst some feel that the price reaction is overdone, others believe that the next few years will offer nil to negative growth. TGA did alot of business thru the GFC years and with a retention rate of only ~45% they will need to write a whole lot more business to cover these contracts as they expire.

The yield of over 7% should compensate investors for a year or two of slow growth, assuming that TGA can have their new initiatives performing well in a couple of years...

I agree that this is the general consensus, but you'll notice that:
- Customer base is still growing, albeit slowly (4%ish, last I remember)
- Other initiatives (TEF, CashFirst, etc.) are still growing

You'll also see that in the last presentation, management stated that they expected growth to slow down, not to stall. Whatever you read that as, it's atleast inflation. I personally expect anywhere between 5-10%, but I'm sure others will end up with different figures.

It really does seem as if that Macquarie analysis has taken a hold...

 

[odds-on]

The pump and dump man has a post about TGA on his blog. Interesting reading, the post seems positive in a muted way.

I am starting to get the feeling that TGA could languish around PE ratio of 7-8 for many months. The question is do i sell now and see if i can make better use of the capital until the next reporting period (possible catalyst) or keep waiting?

 

[Klogg]

The pump and dump man has a post about TGA on his blog. Interesting reading, the post seems positive in a muted way.

I am starting to get the feeling that TGA could languish around PE ratio of 7-8 for many months. The question is do i sell now and see if i can make better use of the capital until the next reporting period (possible catalyst) or keep waiting?

Hmm interesting, just read that. He basically said the company won't grow as fast, may go backwards, may not... In essence, nothing valuable.

A link for anyone who's interested:
http://blog.rogermontgomery.com/is-this-a-thorny-investment/

If you're taking a longer term value-investing approach to this, (5years+), I can't really see the downside to this stock...

 

[odds-on]

I speculate pump and dump man is accumulating. Muted post to buy stock cheap. 6 months down line begin pumping when HY report comes out.

 

[Ves]

The flat to slow growth in earnings for this stock that we will most likely see in the next few years are more due to cyclical factors than they are structural factors IMO. This is why most valuations of this stock seem to be over-priced and why on the contrary the the market has priced it at a P/E of under 8. Market doesn't care about the long-term potential if the next two years don't provide easy gains. The answer lies somewhere in the middle of the "super value" and "no growth" camps.

 

[Pioupiou]

The reason for diverse valuations of TGA lies in what will happen in future, and of course nobody knows, so some folk are negative, some neutral and others positive. I think the business will continue to grow, but at a lower pace than the last five years. For now I make the presumption that EPS will grow 8%, 10% then 12% for this year and the two that follow.

I decided to write a stock analysis for myself to learn if in the process I would change my mind about TGA, and the upshot is that I still like it relative to other ASX-listed stocks. My perspective being that of a retired person interested in dividends now and potential capital gain in the medium term. I sent a copy of my 20-page Magnus Opus to Roger Montgomery, and in his recent blog entry he mentioned that he would provide a link to that report. He quotes me as writing: “I think that Thorn’s growth will slow for 2013, do better in 2014, then experience an up-tick as initiatives like Cashfirst, Thorn Equipment Finance and individual expansion initiatives in Radio Rentals/Rentlo and NCML move from making losses, or small profits, to being acceptably profitable. EPS will grow, but nothing like the EPS CAGR of the last five years.”

The Macquarie Report and Roger M's blurb make much of the 100,000 customers, the 27-month average contract duration, the 44% contract retention rate and customer growth in the recent past relative to the current lower growth – metrics that they suggest may cause TGA's customer numbers and EPS to decline.

The 100,000 customers are the fraction of Radio Rentals/Rentlo's primary customer demographic who now have contracts with Radio Rentals/Rentlo. Expiry and non-renewal of their contracts does not mean that the people leave that demographic and/or that they have perpetually exhausted their need for the items that Radio Rentals/Rentlo supply. Many will return as lessees when new needs arise, joined by first-timers and some whose earlier contracts expired years ago. From memory, their are about 1 million Australian households that are financially stressed, and this demographic is growing faster than total Australian households. Radio Rentals/Rentlo's share of that demographic should not decline over the next few years, and so we would not be too bullish if we assumed customer growth of about 3.5% - it could be higher if the right new products are made available. TGA has a track record of growing profits faster than revenue, plus units like Cashfirst and Thorn Equipment Finance will do well. This is why I think EPS will grow 8%, 10% then 12% as I wrote above. Of course, it could be lower, and perhaps even higher. We just do not know. Management probably have a fairly good idea of what will transpire, so watch out for director buying/selling activity.

PS I do not think that the muted growth for 2013 and 2014 has much to do with the macro economic picture, I think management's focus on the NCML acquisition had an opportunity cost - it detracted from a variety of organic growth options that are now at least a year behind where they should be.