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.