TGA - Thorn Group

[Not Rene]

4 times as many buyers for 4 times as much volume compared to sellers. I don't see a reason to sell just yet!

 

[odds-on]

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.

Keep up the good work Pioupiou. History is important as it allows an investor to make an assessment of how well the management allocate capital. It is probably fair to say that if a management have allocated capital well over the last five years then subject to no significant change in the business model/industry/management they willl probably allocate capital well the next year.

Cheers.

 

[robusta]

This may sound a little strange to some but I am not overly happy about the recent sp appreciation. The announcement of a drp in the future gave me some hopes of adding to my investment somewhere under $1.75 I will probably not participate anywhere near $2.00 at least not this financial year.

 

[RottenValue]

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.

I couldnt be bothered responding to this previously because we fall back into the TA v FA argument but I like Oddson's previous comment.

I have been happily looking in the rear view mirror for some time, selecting companies with a track record of stable, predictable earnings growth of at least 10% per annum over a 5 year period. I then look forward to see if any reason to believe any change in fundamental business or environment in the next year or two and if comfortable buy.

My valuation method is pretty simple, extrapolate the Earnings growth conservatively, determine a bottom quartile PE for the company and then wait to buy it when it hits my target price.

Result, my rolling 12 month return (12/09/2011) to (12/09/2012) is now 25.8% and averaging over 20%pa over the past 4 - I look forward to when we have a bull market rather than this boring sideways one

 

[McLovin]

I couldnt be bothered responding to this previously because we fall back into the TA v FA argument but I like Oddson's previous comment.

craft is an FA guy not TA. His question, which was valid IMO, was about justifying using an accounting construct like ROE to determine future performance, instead of something like ROIC.

 

[Ves]

craft is an FA guy not TA. His question, which was valid IMO, was about justifying using an accounting construct like ROE to determine future performance, instead of something like ROIC.

I use ROIC now almost exclusively over ROE.

The minute I realised that ROE is too wound up in accounting principles, the more things started to make sense in terms of ROIC and its benefits. ROIC tells me what the assets employed are earning right now, ROE is more based on returns decided by what they have cumulatively earnt in the past & what shareholders put into the company (which includes lots of long and short-term noise). It has no concept of what assets were held in the past and what are still held going forward. It also ignores ownership structure. It's not flexible in my opinion (especially when things like goodwill, depreciation, and a whole host of other accounting constructs muddy the waters).

I am also starting to favour EV / EBITDA instead P/E for a litmus test.

 

[tech/a]

Damn
That close
Time to get serious.
Trailing stop to 1.86
Move sell stop to $2.00

 

[oldblue]

Damn
That close
Time to get serious.
Trailing stop to 1.86
Move sell stop to $2.00

Hi tech/a.

I appreciate your posts and try to apply some basic TA oversight to my own decisions but I've never been able to get my mind around the use of Sell Stops. To me, it gets too close to contravening my golden rule of letting profits run and cutting losses quickly - and close to the FA idea of working out a theoretical valuation and deciding to sell once that number is reached. Your "near thing" experience yesterday is a case in point. Another cent or so and your TGA would apparently have been sold and you would have moved on to something else.

Just a different approach, I guess!

Cheers

 

[kermit345]

Pioupiou, not sure that anything under $2.00 is a 'no brainer' anymore. I think a lot of us agreed on the FA side that anything under $1.55 was a no brainer but its starting to get close to reasonable valuations now, not sure there is enough margin of safety in the share price anymore to warrant the risk for reward.

Just my and more than happy to have made the 25+% in the last 5 months on this puppy. Would ultimately like to see it settle above $2.00 but may take some market positivity to help it push through the $2.00 mark. Time will tell, still a nice trend going.

 

[odds-on]

I am also starting to favour EV / EBITDA instead P/E for a litmus test.

V,

Have you been staying up late reading the Geoff Gannon blog?

Cheers

Oddson

 

[tech/a]

Hi tech/a.

I appreciate your posts and try to apply some basic TA oversight to my own decisions but I've never been able to get my mind around the use of Sell Stops. To me, it gets too close to contravening my golden rule of letting profits run and cutting losses quickly - and close to the FA idea of working out a theoretical valuation and deciding to sell once that number is reached. Your "near thing" experience yesterday is a case in point. Another cent or so and your TGA would apparently have been sold and you would have moved on to something else.

Just a different approach, I guess!

Cheers

Yes on two accounts.
(1) I would have been out and happy.
(2) Different approaches.

The sell stop is there for spike moves up.
It sist there and if it gets taken when Im not looking then fine.
In MY case its a rough calculation of where volume (Supply) is
likely to appear.---got it pretty close.

Im also happy to let things run hence the trailing strategy but if stopped out fine.
The plan is to trail the stop up behind the lows in place if it moves forward before
taking me out. Thats what discretionary trading is all about.

 

[Ves]

V,

Have you been staying up late reading the Geoff Gannon blog?

Cheers

Oddson

Yes indeed! I've noticed EV / EBITDA a lot in stuff I have been reading. You have to be super careful though, because EBITDA will not be very useful in highly capital intensive enterprises (but I avoid those in the first place). A few of the fundy-mentalists on Hotcopper seem to love it too.

 

[Pioupiou]

Pioupiou, not sure that anything under $2.00 is a 'no brainer' anymore. I think a lot of us agreed on the FA side that anything under $1.55 was a no brainer but its starting to get close to reasonable valuations now, not sure there is enough margin of safety in the share price anymore to warrant the risk for reward.

Just my and more than happy to have made the 25+% in the last 5 months on this puppy. Would ultimately like to see it settle above $2.00 but may take some market positivity to help it push through the $2.00 mark. Time will tell, still a nice trend going.

Kermit345, $2.00 is just a number that I tossed in as the SP below which I do not bother to consider a partial exit from my relatively large TGA holding. I would get higher values than you do if I have a rosier prognosis of EPS growth, and hence dividend growth. Aside from the person-to-person variability of EPS growth beliefs, valuing shares is an inexact art, and it makes a difference if one is thinking of selling, as opposed to buying. There are many other factors that cause valuations to vary from person to person, and for an individual, from circumstance to circumstance.

You can read a round number like $2.00 to mean somewhere between $1.80 and $2.20. I would probably need $2.20 to tempt me to sell TGA, and then only some of the holding, and at $2.30 I would sell more. My last TGA purchase was on on 21/06/2012, when I bought 7,000 at $1.450 using borrowed funds. Lack of spare funds and the concentration of a large percentage of my net wealth in TGA means I now have a low buy-in price that is peculiar to my circumstances, and it does not represent my view of fair value. If I had no TGA shares, I would buy at $2.00, and sell WOW and/or other stocks that I hold to fund it.

I read this morning that FNArena's calculationms puts the “average” P/E ratio of ASX-listed companies at 13.5, with the star stocks being about 20, and the dullards below 10. To quote: “Removing such "noise" from the data provides us with the following stats:

- Price Earnings ratio for FY13 (including December-2012 companies): 13.5
- Average growth in EPS: 5.3%
- Average dividend: 4.95%”

I am surprised that Mr Market groups TGA among the dullards, or why brokers' consensus is that dividends will level off at about the FY 2012 dividend of 9.5 cents. The diluted EPS is 19 cents, so an SP below $1.90 puts TGA's P/E ratio below 10. Perhaps I should be grateful that the low SP has allowed me to buy TGA at an average price of $1.215, which should pay me about 11.5 cents in dividends and 5 cents of franking credits, and it gets better every year. The historical dividend record is as follows:

- - - - Cents per - Franking Credit -- Year's Div - - Pay Date
- - - - - Share - - - - - Cents - - - - + Franking

Final - -- - 5.50 - - - - - 2.36 - - - - - - 13.57 - - 18/07/12
Interim - - 4.00 - - - - - 1.71 - - - - - - - - - - - - 20/01/12

Final - -- - 4.95 - - - - - 2.12 - - - - - - 12.13 - - 22/07/11
Interim - - 3.54 - - - - - 1.52 - - - - - - - - - - - - 20/01/11

Final - -- - 3.76 - - - - - 1.61 - - - - - - - 9.03 - - 22/07/10
Interim - - 2.56 - - - - - 1.10 - - - - - - - -- - - - - 14/01/10

Final - -- - 2.91 - - - - - 1.25 - - - - - - - 6.84 - - 23/07/09
Interim - - 1.88 - - - - - 0.81 - - - - - - - - - - -- - 16/01/09

If on average ASX-listed stock yield 5% dividend (fully franked), then the presumption is that Mr Market is satisfied with that, and hence my guesstimated 11.5 cents that TGA should pay within the next 12 months suggest (to me) a share value of $0.115/5% = $2.30. That is what I think TGA is worth when I think of it as a the right to a growing income stream, and I'll only fully exit TGA if I find stocks that I think have better ratios of SP to a growing income streams (dividend plus franking credits) with long-term credibility. Notice the high level of subjectivity involved.

I have used my estimate of the sum of the next two TGA dividends, because I disagree with brokers' numbers one finds in Westpac broking (and probably COMSEC), which, starting with the recent pair of 9.5c for FY2012, are: 9.6c, 10.0c and 9.5c for the subsequent three years. You need to alter your arithmetic to suit your own view of what the next two half-year dividends will be, and if it is 9.6c, then dividing by 5% would give $1.92, not the $2.30 that I suggested. If you wanted to apply a larger percentage to accommodate a belief that dividends will flattening, then you will get a lower share value. That is why inter-personal comparisons of guesstimated fair values of shares is a waste of time without knowing the assumptions used by each party.

WOW's dividend history is as follows:

- - - - Cents per - Franking Credit -- Year's Div - - Pay Date
- - - - - Share - - - - - Cents - - - - + Franking

Final - -- - 67 - - - - - 28.71 - - - - - - 180.00 - - 18/07/12
Interim - - 59 - - - - - 25.29 - - - - - - - - - - - - - 27/04/12

Final - -- - 65 - - - - - 27.86 - - - - - - 174.29 - - 14/10/11
Interim - - 57 - - - - - 24.43 - - - - - - - - - - - - - 29/04/11

Final - -- - 62 - - - - - 26.57 - - - - - - 164.29 - - 15/10/10
Interim - - 53 - - - - - 22.71 - - - - - - - - - - - - 23/04/10

Final - -- - 56 - - - - - 24.00 - - - - - - 148.57 - - 09/10/09
Interim - - 48 - - - - - 20.57 - - - - - - - - - - - - 24/04/09

As you can see, TGA has superior dividend growth, and if you compared other metrics, you will find that TGA is generally the superior performer. Brokers' consensus holds that WOW's dividend will increase by 6 cents, which gives $1.34, and this seems reasonable. $1.34/5% = $26.80, whereas WOW closed today at $28.90. Other things being equal, if I hold WOW, I should be prepared to hold TGA at ($28.90/$26.8) x $2.30 = $2.48. Consequently, if I had no TGA, or only a small holding, I would not hesitate to liquidate the WOW holding and buy TGA at $2.00. If I looked at my other holdings, I would come to the same conclusion – that is, TGA is worth buying at $2.00. If I were to subject most investment portfolios in Australia to the same logic, I expect that I would not find reason to alter that contention.

If you look at investing from a different perspective, or if you are a trader, or if you do not share my bullish view of TGA's future EPS and dividends, then you will come to a different conclusion.

What keeps Argo (ARG), Milton (MLT) and other large shareholders in shares like WOW, WBC, TLS et cetera, and away from TGA is that TGA is too small for them. This is why an individual investor can outperform ARG, MLT and others. As an aside, in addition to WOW, I hold both ARG and MLT, but none of the trio with much enthusiasm.

 

[tech/a]

Its goodbye from me on TGA for now.

 

[Ves]

Its goodbye from me on TGA for now.

Well done, you managed this trade nicely IMO.

 

[Boggo]

Its goodbye from me on TGA for now.

And goodbye from me at 1.85.

Follow on from here -
https://www.aussiestockforums.com/f...=18617&page=45&p=727561&viewfull=1#post727561

(click to expand)

 

[Pioupiou]

On Wednesday afternoon when I looked at the TGA transactions, the majority of them were either 503 units, or pairs of concurrent transactions that summed to 503 – to wit:

3:10:46 PM 1.840 503
3:10:46 PM 1.840 503
3:00:44 PM 1.840 503
3:00:44 PM 1.840 503
2:50:43 PM 1.840 9
2:50:43 PM 1.840 494
2:50:43 PM 1.840 503
2:40:41 PM 1.840 503
2:31:32 PM 1.840 85
2:31:32 PM 1.840 418
2:31:32 PM 1.840 266
2:31:32 PM 1.840 237
2:21:31 PM 1.840 323
2:21:31 PM 1.840 180

This afternoon the same pattern was there, except the number was 550 – namely:

3:56:50 PM 1.785 550
3:52:06 PM 1.785 550
3:51:05 PM 1.785 84
3:51:05 PM 1.790 466

At COB, there were three “buy” offers of 862 shares at $1.805, $1.815 and $1.820 – probably at $1.800 and $1.810 too, but with more than one buyer one cannot detect if one of them is a buy for 862 shares.

What this means, I cannot say. It seems that there are sellers wanting to sell, and a buyer going to some length not to pay more than necessary. The sellers are probably traders who scooped up shares at between $1.40 and $1.60, and who are now happy to skip out with a profit, and get into something more obviously underpriced.

On the fundamentals of the business, or brokers' views, I am unaware of anything new. SIV has mode noises to the effect that it is finding heaps of business in small business, which is where Thorn Equipment Finance is shooting the lights out, or so we can read from John Hughes last reported comment dated 23/08/2012 – specifically, “This business a year ago was writing contracts at the rate of $300,000 to $400,000 a month and is now writing $3 million a month.” As an investor, TGA with similar, but better, performance history to SIV is more attractive with debt/equity about 10%, compared to SIV's circa 150%. SIV could grow faster, but it will have to raise even more debt, or seek equity funding to do so.

In about two month's time, about 20/11/2012, the half-year report should be published, which in my opinion should surprise on the upside – Radio Rentals/Rentlo doing well, and the other three smaller units doing very well is my prognosis. This report should allow us to predict the outcome of YE 30/03/2013 with a high degree of accuracy, because TGA is a formulaic business with few surprises.

 

[oldblue]

I hope you're right, Pioupiou, about the forthcoming half year announcement surprising on the upside. I have my doubts though with the recent weakness in the SP at this stage of proceedings, only a week or so away from balance date and when there would be a fairly good idea - for some - of how the six months is panning out. The only saving grace in this is that volumes havn't been out of the ordinary - but I'll be watching next week's trading for signs of heavier selling pressure.

 

[Pioupiou]

I hope you're right, Pioupiou, about the forthcoming half year announcement surprising on the upside. I have my doubts though with the recent weakness in the SP at this stage of proceedings, only a week or so away from balance date and when there would be a fairly good idea - for some - of how the six months is panning out. The only saving grace in this is that volumes havn't been out of the ordinary - but I'll be watching next week's trading for signs of heavier selling pressure.

We know from this forum that "traders" like Tech/A and Boggo operate with trailing stop orders, and if there are many traders involved in TGA, they could account for volume sufficient to spook the market into thinking there must be something amiss with the underlying business, and so the negative sentiment feeds on itself. Maybe there is something awry, but I do not think that is the case, because the 23/8/2012 announcement states that all units are doing well (refer last sentence of the announcement's OUTLOOK reprinted below), and at the unit-by-unit level the announcement states that TEF is doing extremely well, and Cashfirst too. TGA's management would by now have a very good idea of how well TGA is travelling this year.

The YE 30/03/2012 NPAT grew by 26.4%, but because of the NCML acquisition, this is does not merit an accolade. Comparable Diluted EPS figures are 19.01 cents for FY 2012 and 16.69 cents for FY 2011, which is 13.9% growth - not bad. However, I do not know to what metric John Hughes referred in the ambiguous second sentence below - it could be turnover, EBIT, NPAT, EPS or even cash flow. I capitalised words of interest:

“As we look to future financial performance, we know that our intentions to build long term growth have and will continue to involve investment in the short term in advance of returns in coming years. This will affect our RATE OF GROWTH for financial year 2013, which will still be positive but PERHAPS not at the same rate as last year.

We know that Thorn’s approach to building for the future involves ideas, people, management, resources and most important of all, time.

Currently I can report that EACH of our BUSINESSES is PERFORMING WELL.”

If the RATE OF GROWTH refers to NPAT or Diluted EPS, then the second sentence is positive, because the market only expects about 6% Diluted EPS growth. Note the word “perhaps”, which hints that last year's growth (of whatever metric John had in mind) could be mirrored in FY 2013.

The first sentence and the third sentence of the outlook statement are "fillers" that state the obvious, which is probably why both have "we know" in them.

 

[Ves]

Does it really matter if earnings grow by 2% or 6% or 10% this year? As a long term holder I am more interested in seeing if they can maintain their strengths (ie. credit control & asset utilisation & free cash flow conversion) as a new phase of their earnings cycle approaches and price deflation starts to bite. In the scheme of things these mean more to me than the profit result this year. If dents start appearing in their armor I would be a lot more likely to sell than in the case of a profit disappointment.

I think speculating on short term profit growth is a waste of time. Cheers.