TGA - Thorn Group

[tech/a]

Technically
If it can stay above $1.80 then bullish.
Below it is likely to range.---as it is.
I have a trailing stop at $1.67.

 

[RottenValue]

if it gets to $2.20 anytime before March 2014, I'm out but otherwise happy to hold

 

[Pioupiou]

if it gets to $2.20 anytime before March 2014, I'm out but otherwise happy to hold

As I wrote in my earlier post, selling is not an all-or-nothing deal for me - there is a scale that will winkle about 10% of my holding at a relatively low price. I still owe about $120K to family, so I am inclined to sell some TGA's to help me liquidate those debts, and an SP $2.20 could tempt me to sell 10% of my total holding to supply the funds to simplify my life. As for the rest - I'll think about it later, and capital gains tax will form part of the consideration. I would sell more at various SPs above $2.20, and at about $2.50 I could substantially exit TGA. Obviously, if it takes a while to get to $2.50, and in that time the fundamentals have improved in leaps and bounds, then I'll change my plans, and perhaps hold.

I do not want to be caught napping as happened when the SP was circa $2.27 in February and again in April 2011. As I suggested earlier today, $2.27 when the EPS was expected to be nearly 17 cents (diluted EPS transpired to be 16.7 cents for YE 30/03/2011) translates to something like $2.60 with the diluted EPS for YE 30/03/2012 being 19 cents ($2.27*19/16.7 = $2.583). Would that such a good selling opportunity comes around again. My average buy price is $1.215, but I am more inclined to sell from my non-SMSF holding, which has an average buy price of $1.442, which would give me a good profit to offset the misadventures that other stocks have occasioned me.

 

[oldblue]

Technically
If it can stay above $1.80 then bullish.
Below it is likely to range.---as it is.
I have a trailing stop at $1.67.

Not doing too badly in an otherwise rather soggy market. Seems that the defensive qualities of TGA are being recognised in the rush to sell-down the miners?

 

[Pioupiou]

Like an inch worm, the SP has continued moving up in 5-cent steps (roughly). I write this because to me there has been a tendency for sellers and buyers to bunch together with a 5-cent gap between them, and when the buyers catch up, the sellers move up another five cents. I think we can say we have reached $1.80 at about noon today, so the next plateau is $1.85. This is the price used in the capital raising in June 2011.

It now gets more difficult to aver that the SP is a no-brainer, because it is only worth more from an FA perspective if the EPS is going to grow in future, and other metrics not deteriorate. And then there is the question - "Grow by how much?". . .

On the first paragraph, our inch worm reached $1.80 in mid-August. It went back a step, but then reverted to $1.80, where it now dithers. TGA will struggle to get to $1.85, but I think it will get there, eventually.

Since writing the second paragraph quoted above, I have changed my thinking on growth, thanks to material that I recently read on the Internet – which is that the maximum that a firm can grow EPS is at the rate of its ROE. This springs from the definitions of these words, but I found it useful, because by extension, it means that if ROE can be held, then a firm withholding 50% of earnings should grow EPS at a rate half its ROE. I also read that in the USA the majority of long-established firms that have had ROE declines have had it plateau at between 10% and 12%. These things suggests that a spreadsheet could be created for TGA with a starting dividend of about 10 cents (and a franking credit which increases this by 4.3 cents), and have it grow by half of 23.5% for a few years, then decay by some invented factor, say .95, until it reaches 10%, and thence have it plateau at 10%. On the discount rate to be used, Googling the Internet suggests about 11% – roughly 5.5% as a starting point (what the bank pays depositors), plus about 5.5% premium for being in equities. These facts and factors give one a basis to invent a guesstimated fair price for TGA shares based on the NPV of dividends plus franking credits.

One can plug into the spreadsheet whatever parameters with which one is comfortable, and I suggest erring on the conservative side. Do not be too conservative, because the aim is to guesstimate a FAIR price, after which one can apply a factor to arrive at a pessimistic price, and some other factor closer to unity to arrive at a price that would induce one to sell TGA. I get a guesstimated fair price of about $3.00, and by using a factor of two thirds, I get a pessimistic price of about $2.00. One can have more than one adjusting factor – e.g., one to register general pessimism relative to TGA, one to set ones buy-TGA price and one to set ones sell-TGA price.

In my case, the .667 factor that gives $2.00 reflects market pessimism, rather than being a price at which I would buy more TGA shares. A ridiculously low price, other things being equal, would draw me into buying, but then I would have to undertake extreme measures to raise the funds, and I would increase my huge exposure to TGA. An SP of $3.00 x 2/3 x 2/3 = $1.33 would do the trick for me, probably up to say $1.50, but my situation is unique – I have many TGA shares, and over $100K in debt incurred in buying TGA recently in the $1.41 to $1.45 range.

I have often found that a mid-point between two extremes turns out to be a fairly good guesstimate, so using $3.00 and $2.00, one gets $2.50. A better approach is to use a sixth of the range and put it on either side of the mid-point, which gives a range of $2.33 to $2.67. In a normal distribution, a sixth of the range each side of the mid point accounts for some 68% of the statistical "population", which suggests that if a hundred experienced investors who know TGA's business well were asked to calculate a target price for this calendar year, a majority would, in my opinion, invent a target SP between $2.33 and $2.67.

If you upscaled the highest COB prices reached in early 2011 of $2.27 by the ratio of the then-expected EPS to the now-expected EPS, you would get something like $2.27*20.2/17 = $2.70. So $2.67, although generous, it is not a crazy number - it is what one would get if one applied a P/E ratio of about 13 to the consensus forecast 2013 EPS of 20.2 cents (13 x $0.202 = $2.63). Actually, I think the 2013 diluted EPS will be $0.19 x 23.5% x .5 = $0.223. If one increased the June 2011 capital-raising price of $1.85 by 20.2/17, one gets $2.20. I might sell 10% of my holdings at $2.20 to expunge all my debts.

I would be astounded to see the SP linger below $2.00 for the rest of this calendar year, but it can easily happen if the November announcement for the six months ending 30/09/2012 disappoints. I think the results are likely to surprise on the upside, and the directors' outlook even more so. ROE and ROCE should increase, because overhead expenses should be relatively static, and because direct importation of TVs, refrigerators, washing machines and audio equipment will be much larger than for FY 2012, and direct importation of TVs alone in FY 2012 created an estimated $800K saving. Cash flow and debt could worsen marginally, but for good reasons – namely, to expand so-called rental assets to accommodate growth, particularly in Thorn Equipment Finance, and to expand the direct importation of rental assets. Due to its cautious roll-out, the Rent-Drive-Buy initiative will have a near-zero impact in FY 2013.

Let us see what happens.

The foregoing "twaddle" is not meant for chartists, but to keep them happy, I refer to http://au.stoxline.com/q_au.php?symbol=tga&c=ax I do not understand the supporting logic, but the blurb there moots $2.14 for six months and $2.50 for twelve months.

 

[RottenValue]

Pioupiou

My thinking is along the same lines, hence my earlier post that if the price hits $2.20 before March 2014 I will sadly exit my holdings in this well loved stock.

I have always looked at potential earnings growth through the ROE / Dividend Payout Rate combination - for TGA I expect about 12.5% so work on 11% per annum to be conservative.

Given that, I expact an EPS of 21c, 24c and 26c over the next 3 years. However, we have no reason to expect a PE of 13 - history tells you that TGA gets an average of 8 over the past 5 years with 9.3 recently. Using 8.5 to be conservative tells me to take $2.20 if its given to me before March 2014.

However, if the market rerates TGA for some reason before then and moves to a PE of 13 then we are in the money and I will wish I had as much of this as you!

I must admit to thinking of buying even more at the current price - my analysis indicates that a 15% per annum return is highly likely, just struggling with "averaging up" from my current $1.42 buy price.

 

[Pioupiou]

. . . However, we have no reason to expect a PE of 13 - history tells you that TGA gets an average of 8 over the past 5 years with 9.3 recently. Using 8.5 to be conservative tells me to take $2.20 if its given to me before March 2014.

However, if the market rerates TGA for some reason before then and moves to a PE of 13 then . . .

My post reflects recent development in my thinking on valuation. In the past I was inclined to pick a price by comparison with other stocks. I rather like the NPV-of-dividends-plus-franking approach for TGA, because being a steady and formulaic company, one can guesstimate the future with some confidence. As for the pessimistic view that the market ascribes to TGA, this is why I applied a "pessimism" factor of .667 to what the NPV arithmetic tossed out as my Guesstimated Fair Value. I suppose if the market were less pessimistic, I would not have bought so many over the years, so I should be grateful.

If the market sloughs off its pessimism, then I will have the pleasure of doing well on a large holding, and if it does not, then all I have to do is allow the flow of time to let the EPS grow to get the same price, but two or three years later, and pay me a fat dividend in that time. I could in that case hold TGA for many years. The debts that I want to expunge by selling some TGA shares are inter-family debts, and if I do not repay them promptly, it's no big deal.

As we move into trying economic times, TGA will come into its own again, just as it did during the GFC. It's a queer thing that the market is so pessimistic about TGA. If anything, TGA should require an optimism factor relative to the market as a whole.

 

[craft]

The foregoing "twaddle"

That’s a good way to describe it - especially this part

I recently read on the Internet – which is that the maximum that a firm can grow EPS is at the rate of its ROE. This springs from the definitions of these words, but I found it useful, because by extension, it means that if ROE can be held, then a firm withholding 50% of earnings should grow EPS at a rate half its ROE

I have always looked at potential earnings growth through the ROE / Dividend Payout Rate combination - for TGA I expect about 12.5% so work on 11% per annum to be conservative.

This line of thinking seems to be widely accepted but I don’t understand it at all – Actually I think it’s wrong, wrong wrong especially at the most important times. What has historical (accounting) ROE and retention rates got to do with future opportunities to deploy capital and incremental return on those opportunities? And what does historical ROE say about future utilisation and margins on existing capital unless you look back across an entire economic cycle?

A good way to miss every turn is to drive looking in the rear view mirror.

This comment is not specific to TGA - just a more general observation on valuation approaches.

 

[craft]

then decay by some invented factor, say .95, until it reaches 10%, and thence have it plateau at 10%.

This decay in profitability means the company would be consuming capital but generating very little if any increase in value. If 10% is below your required return then at that point it would be destroying value on any retained capital.

The decay you refer to is normal competitive forces driving returns towards the risk adjusted cost of capital. Unless the company has a competitive advantage this is certainly its future. A company that only generate a market rate of return is worth the replacement cost of its tangible assets - end of story.

What’s important in valuation inputs is what excess margin can be sustained by a competitive advantage, how sustainable the competitive advantage is and how much capital can be deployed into that excess margin.

 

[Pioupiou]

This decay in profitability means the company would be consuming capital but generating very little if any increase in value. If 10% is below your required return then at that point it would be destroying value on any retained capital.

The decay you refer to is normal competitive forces driving returns towards the risk adjusted cost of capital. Unless the company has a competitive advantage this is certainly its future. A company that only generate a market rate of return is worth the replacement cost of its tangible assets - end of story.

What’s important in valuation inputs is what excess margin can be sustained by a competitive advantage, how sustainable the competitive advantage is and how much capital can be deployed into that excess margin.

I have never used the NPV approach in real life, so in recent days I decided to play with it, and your post has alerted me to a potential flaw in my spreadsheet, which I'll now think about. As you wrote, one should not retain profits for growth if the ROE of that money is below the required rate of return. The adjustments that I think are required will lower the value, other assumptions remaining equal.

 

[Pioupiou]

One flaw in my logic was that the Y1 EPS was simply increased by the growth (half the ROE), but this base is only valid for the starting year. As profitability slips (ROE declines), one should recalculate it anew each year using equity per share and the lower ROE.

Anyhow the model (my spreadsheet) is very sensitive to the ROE Decay Factor chosen. Using .97 gives a significantly different result to using .95, which leaves one with the problem of selecting appropriate ROEs in future years. This is less intuitive than simply picking apt P/E ratios using other stocks' P/E ratios as a reference.

The ROE plateau is less relevant than I thought it would be, because it happens years in the future, so by its nature NPV diminishes its significance.

All valuation methodologies are flawed. It is best to use a few to get a feel, and then back your hunches. My basic approach is to avoid companies that pay less than 5% dividend, fully franked, and then I investigate if the dividend is well supported by EPS, and it is growing. This filters out the bulk of the stocks on the ASX, so I can focus on those that pass the filter, selecting only one or two that appeal to me the most for reasons like low debt, business stability, low risks, reasonable liquidity, et cetera. Also, I like to invest in companies that I understand. This is why I am so heavily into TGA.

So much for my misadventure into trying to use NPV.

 

[Pioupiou]

This line of thinking seems to be widely accepted but I don’t understand it at all – Actually I think it’s wrong, wrong wrong especially at the most important times. What has historical (accounting) ROE and retention rates got to do with future opportunities to deploy capital and incremental return on those opportunities? And what does historical ROE say about future utilisation and margins on existing capital unless you look back across an entire economic cycle?

A good way to miss every turn is to drive looking in the rear view mirror.

This comment is not specific to TGA - just a more general observation on valuation approaches.

TGA is much more predictable then most ASX-listed companies, and hence its history is more relevant than average, and so looking backward to guesstimate what may happen in future makes sense. If I plan to leave for Canberra tomorrow at 6:00AM, I expect with a high level of certainty by looking back at past trips that I'll probably arrive in Canberra at approximately 6:00PM. If my car has significantly deteriorated, the expectation would have to be tempered. TGA shows no sign of deterioration – actually, it is growing more robust (ROE is increasing).

The nature of TGA's business (giving something in the immediate term for a longer-term return) is an idea that has been valid since before Esau swapped the family farm for a bowel of lentils, and it will remain thus for millennia. TGA's business is now 75 years old, so it is not a here-today-gone-tomorrow flash. ROE has not even entered the ROE-flattening phase, never mind the declining phase.

As long as there are people wanting something immediately, and for which they are prepared to commit a stream of payments, TGA will have opportunities to invest its money at a good return. Normally, TGA makes two profits – a retail profit and an interest-on-loans profit. As one line of business flattens, newer lines take their place. I only suggested an ROE-decay factor in my evaluation model as a matter of conservatism, whereas in reality I believe TGA can come up with new ideas to which it can deploy its funds for many years, and at worst hold the ROE static.

Cashfirst will morph into a money-lending division to expand lending into new markets (new demographics), and TEF will get into a wider range of products and markets. TEF grew from the long-standing TAB-centric computer-supply business by expanding products to include poker machines, commercial-kitchen equipment and telephony equipment, and by now I assume that it is moving into other groups of franchisees, or businesses. TEF could get into financing equipment for gymnasiums, dental clinics – whatever. Radio Rentals/Rentlo division only got into furniture recently, and it has gone ballistic. In summary, TGA is not soon going to run out of opportunities to profitably deploy the earnings it withholds to fund growth.

By keeping the range of items it supplies narrow, TGA can use item volumes to improve its procurement function, and thus assist in keeping ROE high. Direct importation of Thorn-brand TVs is a new initiative, and it was so successful in FY 2012 in reducing costs (by $800K) that TGA has expanded the initiative to refrigerators, audio equipment and washing machines.

Consider the Rent-Drive-Buy initiative. John Hughes said that 170,000 legal immigrants arrive in Australia, and irrespective of their employment status, they struggle to access finance initially, but need things like furniture and cars. TGA deals with a percentage of these people now, and they will be the target market for the Rent-Drive-Buy initiative, which is a different market demographic to the welfare-recipient market on which TGA is currently so reliant. If Rent-Drive-Buy disappoints, TGA can simply drop it, and chase a new initiative.

These initiatives are going to keep TGA's ROE high, and they will allow TGA to avoid low-profit business while expanding turnover.

TGA is a formulaic and boring business, superficially even odious, so it is not going to collapse when key people move on, unless some blithering idiot takes control of the driving wheel. Like the Dutch East India Company, TGA will not last forever, but there will be many signs and ample time for the half-astute investor to exit early.

On the matter of black swans, restrictions to Centrelink's Centrepay facility would be a serious blow to TGA, but that is unlikely. On the positive side, an entity with bags of money, or a similar USA rent-to-buy business, e.g., Aaron's (AAN), could make a bid for TGA, and offer a generous premium on the current SP. As an aside, AAN has a 12-month trailing P/E of 14.37, and from memory TGA has superior metrics. If TGA had a similar P/E ratio, it would be selling at about $2.80 with its diluted EPS being about 19 cents.

 

[Boggo]

An update from my previous post on TGA here...
https://www.aussiestockforums.com/f...=18617&page=43&p=721130&viewfull=1#post721130

All proceeding to plan, entry, stop, quantity and initial potential R/R in place before taking the the trade.

Current sentiment/expectation is that it will continue through the decision area but may hesitate around the $2.00 area (typical Wave 3 target area).
Trailing stop in place to cater for any abnormalities and plan is to just let it continue upwards to wherever while being on the lookout for incoming ROE's and P/E's

(click to expand)

 

[Ves]

Thanks Boggo - is there much chance of a retrace to the "value area" (I know you don't like this!) of $1.40-$1.60?

 

[Boggo]

Thanks Boggo - is there much chance of a retrace to the "value area" (I know you don't like this!) of $1.40-$1.60?

I may be completely wrong but this is how I am seeing it at the moment.
I am expecting it to proceed into the 1.85 to 1.97 area (W.3) where I am expecting it to hesitate. If it does then it is likely to retrace to a W.4 which should be 38% to 50% of the length of W.3 before it resumes an uptrend again.

It is possible that it could just keep going up but there is always a possibility people may take the profit if it starts to hesitate.

There are many "new" TGA type setups appearing daily that provide the nimble footed the opportunity to reap the benefits of the main part of the run up without becoming emotionally attached to any one stock.
Having the ability and willingness to free up capital from holdings that are showing indecision in the expected areas and providing funds for new opportunities seems to be effective in the current climate.

Just my that is working for me at the moment.

(click to expand)

 

[Ves]

There are many "new" TGA type setups appearing daily that provide the nimble footed the opportunity to reap the benefits of the main part of the run up without becoming emotionally attached to any one stock.
Having the ability and willingness to free up capital from holdings that are showing indecision in the expected areas and providing funds for new opportunities seems to be effective in the current climate.

I think the two big instos are (or at least were at the end of August) playing "portfolio pingpong" and as craft (I think it was) mentioned the momentum bridage were starting to get onto the trend at the same time. Hence bigger fluctuations on a daily level. At least that's what it looks like. Trend looks pretty resilient to me too at the moment. It is possible it could be fairly buoyant until news of the half-year report filters in in the next two months. Which could be a new decision point.

 

[tech/a]

Technically trading nicely above $1.80 now.

 

[Pioupiou]

On the first paragraph, our inch worm reached $1.80 in mid-August. It went back a step, but then reverted to $1.80, where it now dithers. TGA will struggle to get to $1.85, but I think it will get there, eventually.

. . . waffle, twaddle waffle . . . I refer to http://au.stoxline.com/q_au.php?symbol=tga&c=ax I do not understand the supporting logic, but the blurb there moots $2.14 for six months and $2.50 for twelve months.

Our inch worm has moved faster than I expected, reaching the $1.85 mark today. That is the price used in the June 2011 capital raising. If one adjust $1.85 by the diluted EPS metrics relative then (16.7 cents for YE 30/03/2011) and the diluted EPS for YE 30/03/2012 of 19 cents, one gets $1.85*19/16.7 = $2.10. Getting to $2.14 in six months and $2.50 in twelve months should be a doddle. Actually, I am looking for the SP to get to $2.15 this calendar year - just a hunch.

 

[tech/a]

Technically trading nicely above $1.80 now.

Will tighten up my trailing stop ($1.74) as soon as I can.
I cant see this above $2.00 technically in this run up.
I also have in place a sell stop at $1.94.

 

[Pioupiou]

Will tighten up my trailing stop ($1.74) as soon as I can.
I cant see this above $2.00 technically in this run up.
I also have in place a sell stop at $1.94.

With a "sell at $1.94, you might have to sell this morning, because our inchworm can smell the cabbage, and is lurching upward. A glance at the buy and sell offers suggests a very good day today. Also, there is a tendency for the after-4PM action to occur within a 1 cent range of the last reasonable price just before 4PM, and yesterday's COB of $1.89 was 1 cent down.

I assume that both TA and FA share valuations are now in alignment. From an FA perspective, below $2.00 still falls into the no-brainer class for the value investor.