TGA - Thorn Group

[burglar]

Value investors sell all the time for all sorts of different reasons ...

Oh dear, did I say it badly … again?!

Nothing wrong with opportunistic trading no matter what kind of investor you are.

Did I say selling is bad …
Your detractors say, you are often trading when you claim to be investing.

I say, find your own path.

You have pluck and courage, posting warts and all.
Good on you.


(Heuristics is an ambiguous word!
In a good way it could mean learning by experience!
In a not so good way it could mean trial and error.)

 

[Julia]

When I think the correct decision is to sell I do not even think about the Tax implications. My comment earlier on this thread was related to the advantages of holding good growing businesses for the long term without constantly trading in and out of them and incurring brokerage and tax costs.

Once again I do not doubt that many on this forum make money from TA and trend following techniques but I do not consider these techniques suit my temperament nor can I see an edge I can exploit over my chosen strategy.

We all do what we're comfortable with, robusta. I wish you luck and hope the outcome is happier for you than on MCE

 

[Julia]

Is it not already a known fact that Julia frequently creates stawman arguments on this forum anyway?

Really?!! That's completely news to me! I've never experienced Julia to be that way inclined!

+1

Tiko Mike, perhaps you'd like to give some examples of these straw man arguments. It's certainly not something I set out to do.
Perhaps not here, though as some people actually want to discuss TGA and/or whether tax should be a consideration in deciding when to sell. Start a separate thread where you can list all your criticisms.

(Thanks to cynic and Boggo.)

 

[burglar]

Happy to oblige! I bought in late June, and although they are a long term hold in my portfolio, I am very happy to see them up over 13% in the 3 months since I purchased.

If it is indeed a long-term hold you should be happy until the tipping point.
Then you should sell and still be happy. But then it's not a long-term hold anymore.

You know ... property value means nothing unless you sell.
House value means nothing unless you sell. You cannot eat bricks.

 

[galumay]

If it is indeed a long-term hold you should be happy until the tipping point.
Then you should sell and still be happy. But then it's not a long-term hold anymore.

You know ... property value means nothing unless you sell.
House value means nothing unless you sell. You cannot eat bricks.

I am not sure if I have understood your point correctly, but if you are gently pointing out to me that its irrelevant if the share price is up 13% and I continue to hold as I have not realised the potential profit, then, yes, I am aware of that.

I guess one of the differences with shares as opposed to property is that on any given day I know exactly what 1 or all of my shares are worth on the market. That can be a double edged sword for the long term holder.

 

[cynic]

Firstly, just a generic (and off topic - apologies!) response to the recent flurry of replies to my abrasive post.

It is the prerogative of each individual to discover one's respective "strong suit" and play one's cards accordingly.

Having said that I believe that it would be a serious error to presume the infallibility of statements made by any guru in any field (investment, medical, scientific ,spiritual, legal etc.) based solely upon their personal health, wealth or ideology.
Those whom disagree need only ask themselves how many kilobytes of RAM their current computer technology requires in order to participate on this forum. (We do all still remember that famous Bill Gates quote, don't we?!).

Whilst I can understand that some will be in disagreement with the vehemence of my post, I'm not quite sure how anyone other than the author (Schwab) can recognise meaning in that chart.
Perhaps his target audience could be expected to know these things in advance. As a minimum, I would certainly want to know the pertinent CGT rates when contemplating that chart, otherwise it is meaningless!

It comes as no surprise to me that some members failed to recognise that my intelligence and stupidity rant wasn't intended to be limited to Schwab! It had a much broader scope! I believe the more intelligent members will understand the implications of my last two sentences.

Secondly (and back onto topic),

I have had past acquaintance with TGA's operations via a brief period of employment within their group. At that time (1999) their parent had just increased market dominance via acquisition of their largest competitors. Based upon my observations, the increased client base combined with structural savings (integration of duplicated administration processes etc.) and a newly created dearth of serious competition would undoubtedly have enabled them to improve their bottom line.
Their client application, certification and credit approval processes were regimented and thorough. As for their arrears department - those guys were truly a force to be reckoned with!

Given the nature of their dominance and target demographic, it comes as no surprise to me that this company has weathered the GFC, but, like all investment decisions, it is prudent to maintain vigilance for any changes material to one's original assessment.

P.S. For reasons more personal than professional, I have been shunning TGA. (My experiences during, and subsequent to, the closure of one of their branches are still far too fresh in my mind).

 

[burglar]

... how many kilobytes of RAM their current computer technology requires in order to participate on this forum. (We do all still remember that famous Bill Gates quote, don't we?!) ...

I had to look it up!
Then I thought to share

640K ought to be enough for anybody.
Bill Gates

Read more at http://www.brainyquote.com/quotes/authors/b/bill_gates.html#4Iu1dXei18hz8h58.99

 

[oldblue]

Thanks to all for the spirited discussion since I woke this thread from its slumbers on 25 September!

 

[RottenValue]

The interesting discussion on this thread was back in May 2012 - those that bought at $1.40 and held have made a total return of 52% per annum (including dividends) and 75% overall. The easy money has now been made but no reason to sell when the stock is likely to continue to return 11% per annum even at the current $2.30.

The free advice provided by many on this forum at that time is worth reflecting on.

Holder.

 

[burglar]

I am not sure if I have understood your point correctly, but if you are gently pointing out to me that its irrelevant if the share price is up 13% and I continue to hold as I have not realised the potential profit, then, yes, I am aware of that.

I guess one of the differences with shares as opposed to property is that on any given day I know exactly what 1 or all of my shares are worth on the market. That can be a double edged sword for the long term holder.

You have understood my point correctly, ...

We all deserve happiness, regardless of how we trade.

 

[Boggo]

...The easy money has now been made but no reason to sell when the stock is likely to continue to return 11% per annum even at the current $2.30.

I agree with the first bit but I have a query on the second bit of that statement.

The TGA share price is now back to just a few cents above where it was in Feb 2011.
Since Feb 2011 it has paid a total of approx 25 cents per share in dividends.
With an average inflation rate of 2.5% there would be an erosion of value of approx 14 cents per share over the same period.
The gain would therefore be 11 cents over that two and a half year period or roughly 4.5 cents per share pa.

That is around 2% pa average over the last two and a half years ?

 

[oldblue]

I took the comment to refer to the increase in SP from around $1.40 in May last year.

 

[RottenValue]

Yep - the return to date is based on the $1.40 buy price which I thought was obvious. Hence the 75% (or 52% per annum effective).

The strong return is because the stock was undervalued and has since returned to a fair level. A look at the fundamentals over the past 5 years will show you it has increased sales by 11%, EPS by 19% and dividends by 20% per annum over that period.

I'll leave you to do the numbers but an expected total return of about 11% is not unreasonable, in fact more like 16% if the PE holds at 12 rather than 9 which is its long term average.

 

[Boggo]

The strong return is because the stock was undervalued and has since returned to a fair level. A look at the fundamentals over the past 5 years will show you it has increased sales by 11%, EPS by 19% and dividends by 20% per annum over that period.

Pick a number, the reality is 2% over the last 50% of that period. Inflation is currently 2.4% and the cash rate is 2.5% !

Nice to see that Alan Kohler is starting to see the light, tonight he stated that regardless of the theory and numbers the reality is that the market has broken the trendline as he looked at a chart

 

[RottenValue]

Boggo

I give up, I'll just go and draw a line on a chart. Seems too hard to grasp anything else

 

[kermit345]

Your both talking about different periods of time from different dates so the comparison is pointless anyway? Essentially your both correct given the timeframes each of you are looking at, not sure it really serves much purpose though.

RV, while EPS has continually grown for TGA the growth wasn't as substantial YoY for 2013 compared to 2012. I understand it had a lot to do with their investment into growing new revenue streams but i'd like to see the EPS continue to improve in the 2014 reporting.

Certainly agree with you regarding dividends though which are also fully franked, still can get a reasonable yield at the moment of around 4.5% excluding the franking credits. Luckily my cost base is $1.50 so i'm getting a 7% yield on invested capital plus franking.

I'm not sure TGA will continue to grow at 11% per annum, to make that simple assumption is a bit extreme but i'm comfortable to continue holding as I can't find any other opportunities at the moment and i'm happy with the position TGA is in as I don't see it being overvalued just yet, just fairly valued.

 

[Pioupiou]

With the benefit of hindsight, there are various points in time between 2011 and now when I should have sold TGA at SPs in the $2.25 - $2.40 range, but I did not, and there were times when I should have bought, but I did not (although I did buy 80,000 at $1.433 in May-June 2012). Drawing lines between SPs at these high and low time points and the current SP will give a variety of slopes – comparing them is pointless.

My current view is that 2011 was a disaster caused by TGA paying far too much for NCML. This did not reflect in the EPS then, but it has been shifted to the five years ending 30/03/2016 via the $1,760,000 a year amortisation of NCML's so-called Customer Relations asset. The real cost may be worse, because one could ask where TGA would be today without the NCML distraction, and without the need to increase share numbers to raise the capital to buy NCML. I take heart in the notion that management will not repeat that mistake, and stick to organic growth in future.

The value of TGA substantially depends on the current view of TGA's EPS growth, which varies from investor to investor, so I can only venture what I think. I presume that the initiatives like TEF, Thorn Financial Services, the now-bedded-down NCML and small changes within Radio Rentals/Rentlo will, because some expenses pertaining to initiatives will not grow at the same pace as gross profit, see TGA grow EPS at an increasing tempo of something like 6% in 2014, 7% in 2015, 8% in 2016 and 9% in 2017. Retail margins will play a lesser role, but increased use of debt funding should compensate for that.

All companies decelerate revenue growth and profitability over time, so I presume the current growth spurt occasioned by TGA's relatively new initiatives will do that too. For my model I have the 9% EPS growth in 2017 being repeated in 2018, and then retreating at the rate of .9 of the preceding year's growth until it plateaus at say 4.5%. This equates to an average growth of 5.444%. This is not too toppy for TGA, which currently has a ROIC of about 20%, a WACC of 9.42% and a dividend payout ratio of 55%.

To derive a value-for-me I use my mortgage rate of 5.4% uplifted by an equity-risk-premium factor of 1.8, and I apply it as the discount rate to the stream of after-tax income that I get from TGA, which is (EPS x Payout Ratio ÷ .7) x (1-.325) for holding TGA personally, and for holding it within my SMSF I change the last multiple to (1-.15), because I have assumed my marginal tax there is 15%. In essence, I reduce the matter to either holding TGA for the benefit of the dividends, or reducing my mortgage to reduce the interest it racks up. I have not adjusted the monthly-compounding mortgage rate to an annual equivalent, nor have I recognised that the dividend comes in two six-monthly payments, but as my 1.8 equity-premium uplift factor is on the rough side, and it bounces about with mood swings, not much purpose is gained by more feigned precision than I have already used.

Depending on EPS growth being as per my model (5.444% average), to me TGA is worth about $2.50 in my personal portfolio, rather than hurling funds at my mortgage. Obviously, if I knew of a better competitor than paying money off my mortgage, then I should examine that option. Below is a table for different EPS growths converted to after-tax dividend-cum-franking-credit income, pursuant to the assumptions provided so far.

Personal - Growth - SMSF
$1.042 - - 0.00% - - $1.312
$1.338 - - 2.00% - - $1.652
$1.553 - - 3.00% - - $1.898
$1.842 - - 4.00% - - $2.230
$2.253 - - 5.00% - - $2.703
$2.886 - - 6.00% - - $3.429

$2.498 - - 5.444% - $2.983

I do not expect Mr Market to share my views on TGA, but by the end of calendar year 2013, my punt is that TGA will be about $2.40. The half-year report due on 20 November should help to shed light on its EPS trajectory. As an aside, I can now live off my TGA dividend, and the money invested in it cost me a little over half what the portfolio is now worth - I wish there were more stocks like it.

 

[Pioupiou]

. . . blah, blah blah . . . I do not expect Mr Market to share my views on TGA, but by the end of calendar year 2013, my punt is that TGA will be about $2.40. The half-year report due on 20 November should help to shed light on its EPS trajectory. . .

I am happy to see that Xmas came early for me, and TGA reached $2.40 in October. I had 515,500 shares, with the 15,500 bought recently at about $2.22 with the intention of making a small and relatively speedy profit, so I sold them today at $2.60. As for the 500,000, they are worth just over twice what I paid for them, and I am happy to sit on them and milk their growing dividend, which forms a large part of my annual income as a self-funded retiree. Bless the day that I tumbled on TGA - it has saved my bacon after the ravages of the GFC (I entered the market in late 2007 - the worst possible entry point, generally speaking).

Knowing my track record of SPs bounding ahead as soon as I sell, TGA shares may well hit $3.00. I had in this or another site ventured $2.40 by Xmas 2013 and $3.00 by Xmas 2014, but I now suspect Xmas 2014 will come very early. On 19 November the half-year-ended-30/09/2013 announcement is due, and that should give an idea of how well the traditional Radio Rentals/Rentlo business is tracking, and how well a fistful of new initiatives are gaining traction, including the turn-around of NCML as a service company.

 

[oldblue]

It's over a week now since TGA reported its interim numbers. With reported NPAT -5% and that "other" number, underlying profit +2.9% it seems a steady as she goes result - can't call it disappointing in that the company didn't provide any prior guidance. But it justifies the weakness in the SP in recent weeks!



Thorn Financial Services has me a bit puzzled. Customer base is down y/y and the average loan value is steady at $2,400, yet the Loan Book has increased! I wonder how that works?

 

[oldblue]

It's over a week now since TGA reported its interim numbers. With reported NPAT -5% and that "other" number, underlying profit +2.9% it seems a steady as she goes result - can't call it disappointing in that the company didn't provide any prior guidance. But it justifies the weakness in the SP in recent weeks!



Thorn Financial Services has me a bit puzzled. Customer base is down y/y and the average loan value is steady at $2,400, yet the Loan Book has increased! I wonder how that works?

Got it!

It must be customers with multiple loans!