TGA - Thorn Group

When I assumed that TGA would fund buying NCML with debt, this was just a device to see if the acquisition cut the mustard, and it did. I then ignored NCML to see if TGA was worth more than the Friday, 18/3/11, closing price without NCML, and it was worth at least 25% more, which was good enough for my purposes.

As an aside, the announcement stated that the debt to equity ratio would only get to 30%, which is hardly worrying for a solid stock like TGA. The announcement referred to a possible equity raising to reduce the debt used to buy NCML.

I am looking forward to reading the annual report to learn how well the roll-out into smaller stores has been, and to learn management's prognosis for YE 31/3/2012.

What is TGA worth? All I can say is that it is worth something north of $2.50. One wag said his valuation was $2.75, which is a value I got when using the ROE-based technique advocated by Roger Montgomery. Another suggested $3.00. They both will be proved to be correct in the fullness of time provided the market reasonably reflects value.

From memory, Thorn Group's financial year ends on 31 March, so we should expect the full year results in the next six or seven weeks - last year's results were released on 25 May 2010. I wonder if we'll see some buying on the rumour and selling on the fact in the next couple of months, given that the company upgraded guidance a few weeks ago.

Looks to my very novice technical eyes that we've had a short-term double top at about $2.30/share and consequently, the share price is hovering just about $2.00/share at present. With TGA effectively pre-announcing its full year results, I wonder if those interested in the company believe that all the good news is already factored in and they're waiting for another trigger before buying into TGA.

McCoy Pauley said:

Looks to my very novice technical eyes that we've had a short-term double top at about $2.30/share and consequently, the share price is hovering just about $2.00/share at present. With TGA effectively pre-announcing its full year results, I wonder if those interested in the company believe that all the good news is already factored in and they're waiting for another trigger before buying into TGA.

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Lots more to be absorbed and analysed by busy minds than just the profit figure...cashflow is equally if not more important....

On Pauley McCoy's $2.30, I have heard that some valuations have valued TGA at $2.30, but I have not seen the valuations. I would suspect that they are based on information that belies TGA's real worth. When the interim report comes out on 24 May, we might get more cogent valutions based on more current facts.

On VSntchr's cashflow comment - TGA's core business, rental, has robust cash streams pouring money into the coffers - enough for TGA to get into the money-lending business to use some of it. The one-time cash requirement to buy its latest acquisition is just a blip in a business that is intrinsically cash generating.

Below is a cut and paste of something I wrote over Easter while playing around with the way Roger Montgomery (RM) suggests one arrive at intrinsic value. I do not agree 100% with RM, but the numbers are not very different to what I would anyway guesstimate. Because RM's "intrinsic value" has a meaning specific to his methodology, it makes sense to get a number of these for a few years, and then interpolate a value that you would ascribe to the stock based on the trend, and hence I decided to look at 2009, 2010, 2011 and 2012 (using guesstimates for 2012)

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TGA's figures for YE 31/03/2011 and YE 31/03/2012 could be improved soon, because TGA should come out with the formal YE 31/03/2011 numbers (preliminary report 24 May 2011), and this should provide a better basis for YE 31/03/2012 than my guesstimates below, where I guesstimated:

* 31/03/11 equity by adding for H2 the increase for H1;
* 31/03/12 equity by adding 50% of the estimated earnings;
* 31/03/11 share # by adding the performance rights # to the 30/09/11 #;
* 31/03/12 share # by adding a further 1.5 million shares;
* YE 31/03/11 earnings uses mid point of forecast $22M to $23M; and
* YE 31/03/12 earnings by adding $3M to YE 31/03/11 earnings,

and I assumed the payout ratio is a consistent 50% and an RR of 10% was suitable for TGA (an A1 company), plus I arrived at the RM factor for zero dividends by primitive interpolation from the table on page 184 of RM's book “VALUABLE”.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . YE 3/2009 . . YE 3/2010 . . YE 3/2011 . . YE 3/2012
Earnings YE 31/3 . . . . . . . . . . . . . . . . . . $12,320K . . . $19,495K ,. . $22,500K . . .$25,500K
Equity - start of year . . . . . . . . . . . . . . . . $66,162K . . $69,262K . . $81,767K . . . $94,791K
Equity – end of year . . . . . . . . . . . . . . . . $69,262K . . $81,767K . . $94,791K . .. $107,541K
Average Equity . . . . . . . . . . . . . . . . . . . $67,712K . . . $75,514K . . $88,279K . . $101,166K
Earning/Average Equity . . . . . . . . . . . . . . . 18.19% . . . 25.82% . . . . 25.49% . . . . 25.21%
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 128726K . . 129441K . . . 130737K . . . 132237K
Av Equity per shre . . . . . . . . . . . . . . . . . . $0.5260 . . .. $0.5834 . . . $0.6752 . . . $0.7650
EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.57c . . . . . 5.06c . . . . 17.21c . . . .. 19.28c
RR (required rate of return) 10%
Assume Payout Ratio 50%
RM's factor where DPS=EPS . . . . . . . . . . . . . 1.8195 . .. . 2.5816 . . . . 2.5487 . . . . 2.5206
RM's factor where no div . . . . . . . . . . . . . . . 2.9447 . .. . 5.5210 . . . . 5.3929 . . . . 5.2833
Factor (average above) . .. . . . . . . . . . . . . . 2.3821 . .. . 4.0513 . . . . 3.9708 . . . . 3.9020
Intrinsic Val (Factor x av equity per share) . . $1.253 . . . . $2.363 . . . . $2.681 . . . . $2.980

Remember, in the table above the words “intrinsic value” are used in RM's time-static way, whereas it is normal to consider the time-value of money when estimating value for a point in time. Also, I am a tad apprehensive of the row of numbers for “RM's factor if no dividend” - too high, maybe.

To be pragmatic, one could simply assume that a share of this quality should enjoy a PER or say 14.5, which to err on the conservative side is an average PER, and arrive at 17.21 cents x 14.5 = $2.50. TGA is better than average, which is why RM classes it as an A1, so one could use a higher target PER and get a higher value – e.g., 17.5 would give $3.01. In my view, TGA is worth somewhere between $2.50 and $3.00.

Bought 25000 more today at $1.995. Between my personal holdings and my SMSF, I now have 310,000 of the little beauties, and I am not selling, in spite of being 100% ahead of my total investment at today's SP of circa $2.

Bought another 23,500 today (13/05/11) at $2. Being Friday the 13th, this might turn out to be a bad buy, but I think not.

I rather fancied having 333,333 TGA, so when in the fullness of time TGA gets to $3, perhaps a year hence, I'll have $1 million worth of the stock. Anyhow, I now have 333,500 - that is conviction for you.

I hope I am right about TGA's intrinsic value. Preliminary report for YE 31/3/11 is due on 24/5/11. Let us see what transpires.

Pioupiou said:

Bought another 23,500 today (13/05/11) at $2. Being Friday the 13th, this might turn out to be a bad buy, but I think not.

I rather fancied having 333,333 TGA, so when in the fullness of time TGA gets to $3, perhaps a year hence, I'll have $1 million worth of the stock. Anyhow, I now have 333,500 - that is conviction for you.

I hope I am right about TGA's intrinsic value. Preliminary report for YE 31/3/11 is due on 24/5/11. Let us see what transpires.

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Wow you must really have some confidence in TGA,
I bought a drop in the ocean compared to how many you have.
I bought mine at 1.90 and pretty pleased to get them at that price.

I like days like today on the ASX, its a bargain hunters paradise almost lol.

Seems there are a few of you that have similar holdings...I have 2 major holdings TGA and CCV entered TGA in Sept 09 @ .69 added up to .98 and entered CCV in March last year and added recently @ .81.
I sold some TGA at $2.28 on the run up...gut feel was it needed a drop soon before it could go again . I added to CCV with some those funds and readded a week or so ago with the rest.
CCV needs debate ( I made a post there) with the scheme but TGA looks stellar after a drop. The model is great and providing there are no surprises in the near future looks to me the thing has reset and ready for another run just needs time.
Someone mentioned TSM I put that on my watchlist did some research.. figures out this week I think...a friend bought into FXL @ 1.90 recently maybe that stock is of interest to some.
Seems this niche is giving returns with a good chance of upward movement in a market that otherwise seems light on for prospects.

CCV is still a bit too high for me to purchase now, If it gets under 80 I will look at it, otherwise wait for the next annual report.
Im just being disciplined at my approach with it, thats all.

I have bought TGA over the years at various prices ranging from 55 cents to $2.03, with an average price of $1.07. Just in case the market grows even more foolish than it is, I have an order in to buy 15,000 at $1.96, but I do not expect to pick them up at that price.

Months ago I wanted to sell 20,000 at $2.30, but the shares never sold, and the price retreated to below $2. At below $2, I'll keep on buying, if I can raise the money to pay for them.

Let us see what happens to TGA next week, and the weeks that follow, and then the months that follow, and in my case, then the years that follow. I have liked TGA since 2007 when I first invested in them, and I have never sold.

I sold most (49,000) of my CCV at 83.5 cents to pay for more TGA, and I only have 2,000 left. I would have been happy to hold CCV, but I needed to release funds.

TGA went as low as 1.96 today and then got back up.

Well, although TGA reached $1.96 yesterday, I did not bag any - in spite of having a buy oorder for 15,000 at $1.96. I did not expect to land any at the price, but I was hoping for a rush of stupidity in the market.

TGA's price closed with some conviction today at $2.04, and it should edge upward in anticipation of the preliminary report on 24/5/11 for YE 31/3/11. Actually, the report should not surprise those who heed TGA's occasional announcements, but it should astound those who do not. The report should be a catalyst for analysts to recalibrate their SP predictions for TGA. Let us see what happens.

Pioupiou said:

Well, although TGA reached $1.96 yesterday, I did not bag any - in spite of having a buy oorder for 15,000 at $1.96. I did not expect to land any at the price, but I was hoping for a rush of stupidity in the market.

TGA's price closed with some conviction today at $2.04, and it should edge upward in anticipation of the preliminary report on 24/5/11 for YE 31/3/11. Actually, the report should not surprise those who heed TGA's occasional announcements, but it should astound those who do not. The report should be a catalyst for analysts to recalibrate their SP predictions for TGA. Let us see what happens.

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I noticed on RMs blog that he has a 2011 valuation of 1.46 for TGA.

Intrinsic Value said:

I noticed on RMs blog that he has a 2011 valuation of 1.46 for TGA.

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Yeah noticed that to. He had a value of $1.14 after the last annual report and this update is after the half yearly report. I had a IV of $2.04 after last annual report and an IV of $2.21 after the half yearly report so my IVs are well above his. The last time my IV was well above RMs was when I asked him about Forge (FGE) as my IV was around $7 and he had it around $4. He just said it was a combination of analysts forecosts that were conservative (something like that). I think he upgraded Forge soon after that and we know what has happened to Forge since. I feel quite comfortable with my IV as I have researched the company and believe they are on the right track. In fact the company sounds like most Value investors as they only purchase companies at or below market value. I'm happy to be on board this company.

One has to be careful evaluating an intrinsic value for TGA, because, atypically, its YE is 31 March. Hence its last report was the half year ending 30 September 2010. The figures to be released a few days from now, on 24 May, are for the full year ending 31/3/11.

Morningstar provides figures for a stated year, and folk using figures from there (e.g., from Westpac or Comsec) may make the incorrect assumption it means the year ending in June.

I have seen broker (using the word loosely) evaluations for TGA as high as $2.90.

If Roger M is not talking about TGA as much as he does about FGE, MCE, TRS, JBH and Oroton, it is perhaps because he is hoovering up TGA, and he'll talk about it when his coffer is full. I now have 335,000 TGA, and, ceteris paribus, I would buy more if TGA fell below $2 , even though I am concerned that my portfolio is so lopsided.

I really do think that alot of people on here and on Roger's blog over value TGA..I really cant see how people are coming up with numbers close to $3...that said - I think its a great business in a industry with good prospects...

Rogers latest val is mid $1, mine is roughly $1.80...I really dont think he would be hoovering it up at present given he has recently stated his IV which is below the current SP.

VSntchr said:

I really do think that alot of people on here and on Roger's blog over value TGA..I really cant see how people are coming up with numbers close to $3...that said - I think its a great business in a industry with good prospects...

Rogers latest val is mid $1, mine is roughly $1.80...I really dont think he would be hoovering it up at present given he has recently stated his IV which is below the current SP.

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You and RM may be right - like the Pope, I sometimes err on temporal matters.

The preliminary report for TGA's financial year ended 31/3/11 should be available in two or three trading days hence - it is due on Tuesday, 24/5/11. This is so soon, that I may as well reply to the above when the report is published, because then I can use less conjecture. I'll re-examine my valuation of TGA on 24/5/11, and post it into this thread. Who knows - the exercise might illuminate the error of my thinking, and then I'll change my tune. Obviously, if I use a desired rate of return of 10%, then I am going to get a different answer to somebody using 20%.

This is not the reply that I promised to write as soon as the new figures are available from theTGA preliminary report for YE 31/3/11, but just for the hell of it, I took my figures from my posting of 24 April 2011, and changed the required rate of return (RR) from 10% to 12%. This makes a large difference. Below are the results of my earlier estimates:


. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . YE 3/2009 . . YE 3/2010 . . YE 3/2011 . . YE 3/2012
Earnings YE 31/3 . . . . . . . . . . . . . . . . . . $12,320K . . . $19,495K ,. . $22,500K . . .$25,500K
Equity - start of year . . . . . . . . . . . . . . . . $66,162K . . $69,262K . . $81,767K . . . $94,791K
Equity – end of year . . . . . . . . . . . . . . . . $69,262K . . $81,767K . . $94,791K . .. $107,541K
Average Equity . . . . . . . . . . . . . . . . . . . $67,712K . . . $75,514K . . $88,279K . . $101,166K
Earning/Average Equity . . . . . . . . . . . . . . . 18.19% . . . 25.82% . . . . 25.49% . . . . 25.21%
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 128726K . . 129441K . . . 130737K . . . 132237K
Av Equity per shre . . . . . . . . . . . . . . . . . . $0.5260 . . .. $0.5834 . . . $0.6752 . . . $0.7650
EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.57c . . . . . 5.06c . . . . 17.21c . . . .. 19.28c
RR (required rate of return) 10%
Assume Payout Ratio 50%
RM's factor where DPS=EPS . . . . . . . . . . . . . 1.8195 . .. . 2.5816 . . . . 2.5487 . . . . 2.5206
RM's factor where no div . . . . . . . . . . . . . . . 2.9447 . .. . 5.5210 . . . . 5.3929 . . . . 5.2833
Factor (average above) . .. . . . . . . . . . . . . . 2.3821 . .. . 4.0513 . . . . 3.9708 . . . . 3.9020
Intrinsic Val (Factor x av equity per share) . . $1.253 . . . . $2.363 . . . . $2.681 . . . . $2.980

If I use an RR of 12%, the IV (the above bottom line) drops to:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . YE 3/2009 . . YE 3/2010 . . YE 3/2011 . . YE 3/2012
Intrinsic Val (Factor x av equity per share) . . $0.669 . . . . $1.440 . . . . $1.632 . . . . $1.815

Many people using Roger Montgomery's formula for deriving intrinsic value use the RR as a level-of-comfort factor, but this makes a big differences in the "intrinsic values" (IV) that different folk derive. Consequently, when I write the promised blurb in a few days time, I'll expend some effort justifying a low RR for TGA - namely 10%.

Also, if one looks at Roger's list of A1 companies, he has TGA with an IV of $1.57 for 2011. As the figures for 2011 have not been published, I am unsure what metrics and what RR he has used. You can see from the above that if I used 12% for the RR, my IV is not very different to Roger's.

Anyhow, I'll treat this matter in more detail next week.