TGA - Thorn Group

Pioupiou · 27 November 2013

oldblue said:
Got it!

It must be customers with multiple loans!

I doubt if that is the reason for the apparent anomaly. The anomaly result from Cashfirst being a new business, so the loan book has not had sufficient time to average into a steady-state for a set number of customers.

The average loan of $2,400 relates to the value on the day the deal is done. Consequently, the average loan outstanding is a smaller value, and those close to expiry much smaller. The impact on the loan book of expired loans is small, because a year ago they would on average have repaid most of the loan. In contrast, if in the last 12 months Cashfirst signed up as many $2,400-a-pop new customers to replace those that expired in that period, their relative newness would occasion the impact on the loan book to be roughly $2,000 per customer. Also, I think the average loan some three years ago was less than $2,400, which would exaggerate the anomaly, and a spurt of new loans recently would do likewise.

Ves · 29 November 2013

An analysis of Thorn Group / RR’s margin history may provide useful for those with a more long-term view on the stock. It can be mildly cyclical over the whole business cycle, and as mentioned in a few of the past posts since 2011 we are going to approach the peak of that cycle in the next few years (if we have not already). Their business is generally impacted by price deflation in product categories, wage growth and stagnation in their socioeconomic target areas and the price competition (both by direct competitors and inadvertently through companies in related industries).

I’m not sure how others deal with margin fluctuations in their valuations of TGA – but it would appear, at least to myself, that using the margins achieved in 2012 and 2013, and extrapolating them into the future would be a dangerous game to play.

Historical EBITDA margins for the whole business (EBITDA used to neutralize any changes in accounting policy)

2003 – 21.73%
2004 – 29.62%
2005 – 31.7%
2006 – 34.2%
2007 – 35.2%
2008 – 33.0%
2009 – 31.0%
2010 – 31.8%
2011 – 35.5%
2012 – 37.5%
2013 – 36.8%
20141H – 33.8%

Please note that a more in-depth analysis of the segment margins are required in the years post-acquisition of NCML and the ramp up of TEF and Cash First etc.

Pioupiou · 1 December 2013

Ves said:
An analysis of Thorn Group / RR’s margin history may provide useful for those with a more long-term view on the stock. . . blah blah . . . using the margins achieved in 2012 and 2013, and extrapolating them into the future would be a dangerous game to play. . .

I think TGA's margins will shrink, because for Radio Rentals/Rentlo certain new lines like Apple products have very slim retail margins, and furniture has a higher delivery cost. The stuff that TEF shifts would also have a lower retail margin than the traditional products sold in earlier years by Radio Rentals/Rentlo. TGA may have to look to profit from financing to recover the loss of retail margin, and to do this it will increase borrowing and attempt to make up for the loss of margin via greater volume. Paying interest on borrowings would itself lower the margin further. There would in this thinner-margin business setting have to be a huge growth in volume if TGA is to retain/grow its EPS.

craft · 1 December 2013

As I see it retail margin is just a small part of the TGA picture. The real story that drives their margins is Net Interest spread. TGA have taken on lower retail margins to drive higher volume exposed to positive credit spread, this has an accounting timing impact on margins as volumes change but not an economic one. They are also incurring some short term pain to get other lines of extending credit going – quite unfashionable to a market that only looks to the next earnings report but the sort of thing that keeps me on the register.

On the funding side, to lower their cost of funds they are moving more towards debt financing and considering the current conservativeness of the balance sheet – that to a limited degree is acceptable.

On the revenue side – anybody can lend money to low credit borrowers and reap the initial excess risk premium. It is however the company that can manage credit losses the best that will have the highest long term loss adjusted spread.

The low of TGA's margin cycle will be the height of economic difficulties for their customers. Retail margin is insignificant compared to interest spread and bad loans.

Selling stuff is just a way of extending credit. TGA is essentially a finance company to low grade borrowers – Its long term success lays in the credit spread and considering the market controls the cost of its funds and competition controls the margin it can extract from its customers – its real area of potential competitive advantage is in assessing and collecting the credit it extends – that’s why unlike many others I liked the strategic thinking behind NCML – it demonstrates the focus on their core controllable advantage.

It will be interesting to see with the change of CEO whether the credit focus and conservative balance sheet is entrenched in the culture or if it gets led in a new direction. I know lots would think TGA should be more aggressive but I’m not one. Turtle on TGA.

Pioupiou · 2 December 2013

craft said:
As I see it retail margin is just a small part of the TGA picture. The real story that drives their margins is Net Interest spread. . . blah blah . . .

I agree with all that you wrote Craft, but I would like to get a feel for the magnitude of the retail margin in the total picture. Is it 5%, 10% or even higher? My percentage assumptions below are crude, so somebody who has a better set of metrics could improve on them.

I do not know how much of TGA's profit springs from sales margins as opposed to financing spreads. To invent numbers, let us say that it was historically 15% and 85% respectively when the average retail margin was 30%. In this historical setting, any thin-margin (say 10%) business would margin would change these percentages to something like 6% and 94%.

If the entire future business were to be thin-margin lines, then TGA would have to expand its volume of items shipped by about 10% just to stand still EPS-wise. There are small time-related distortions in real life, because TGA treats the profit recognition of the retail margin immediately under finance leases, and it spreads them over the term of the lease under operating leases. If the recent spurt in thin-margin smartphone business had been in normal-margin (30%) business the profits recognised in that time would, assuming the latter too were handled via finance leases, then would have been noticeably higher.

Obviously, some of the new business, Cashfirst for instance, does not have a retail margin, but this can simply be part of the averaging down of the retail margin as a percentage of the whole of TGA's business.

Ves · 2 December 2013

craft said:
As I see it retail margin is just a small part of the TGA picture. The real story that drives their margins is Net Interest spread. TGA have taken on lower retail margins to drive higher volume exposed to positive credit spread, this has an accounting timing impact on margins as volumes change but not an economic one. They are also incurring some short term pain to get other lines of extending credit going – quite unfashionable to a market that only looks to the next earnings report but the sort of thing that keeps me on the register.

On the funding side, to lower their cost of funds they are moving more towards debt financing and considering the current conservativeness of the balance sheet – that to a limited degree is acceptable.

On the revenue side – anybody can lend money to low credit borrowers and reap the initial excess risk premium. It is however the company that can manage credit losses the best that will have the highest long term loss adjusted spread.

The low of TGA's margin cycle will be the height of economic difficulties for their customers. Retail margin is insignificant compared to interest spread and bad loans.

Selling stuff is just a way of extending credit. TGA is essentially a finance company to low grade borrowers – Its long term success lays in the credit spread and considering the market controls the cost of its funds and competition controls the margin it can extract from its customers – its real area of potential competitive advantage is in assessing and collecting the credit it extends – that’s why unlike many others I liked the strategic thinking behind NCML – it demonstrates the focus on their core controllable advantage.

It will be interesting to see with the change of CEO whether the credit focus and conservative balance sheet is entrenched in the culture or if it gets led in a new direction. I know lots would think TGA should be more aggressive but I’m not one. Turtle on TGA.

Hi craft - thank you for the generous contribution and insight. It does fill in some gaps in my thinking and (shamefully – disappointed with myself) whilst I had thought of a lot of these things I hadn't been able to tie them all together nearly as well as you have in your post. I felt a little bit inadequate after reading your summary yesterday… whether that is a function of my own lack of experience or a lack of insight skill or both remains to be seen.

I said in my first post that the cyclical nature of TGA's margins was impacted by wage growth and stagnation in the socioeconomic bracket of their customers (and this directly impacts their customer's desire for credit and their ability to service it). That’s only really part of the story. The elephant in the room that I did leave out is employment / unemployment. There's obviously also the element of this demographic that Fund their purchases via Centrelink and other government entitlements. Borrowing capacity / credit servicing capacity and ability to repay are always going to be cyclical in nature… and I think you are right, the bottom of the cycle is going to be when TGA’s customers can least afford more debt (they’ve already borrowed too much) and that is the most dangerous period in terms of them protecting their exposure to bad debt from both existing credit and new credit. They do have some safety nets in this respect (Pioupiou mentioned that they have an agreement with Centrelink) and they obviously have some expertise (at least historically) in managing credit risk over the whole cycle.

I agree regarding NCML (see post #965 in this thread). It’s much too early to judge the benefits provided by this acquisition outside of a desire for instant gratification in my opinion.

Continuing to learn every day… and it’s beneficial that a business like this moves pretty slowly, is pretty solid and lets you gain knowledge and insight over time…. Making it a bit harder to be immediately punished for your lack of knowledge at the outset.

craft · 2 December 2013

Ves said:
Hi craft - thank you for the generous contribution and insight..

You do know I just make this **** up to try and make sense of the world - its possibly all wrong

Ves said:
It does fill in some gaps in my thinking and (shamefully – disappointed with myself)whilst I had thought of a lot of these things I hadn't been able to tie them all together nearly as well as you have in your post. I felt a little bit inadequate after reading your summary yesterday… whether that is a function of my own lack of experience or a lack of insight skill or both remains to be seen.

VES you woefully underestimate yourself. Young, smart, quick learner - you've got it all over me. If it wasn't for my inventory of lessons learned the hard way (which I'm still accumulating) I wouldn't know much at all.

VSntchr · 2 December 2013

craft said:
VES you woefully underestimate yourself. Young, smart, quick learner..

+1. I'll second that.

McLovin · 2 December 2013

craft said:
You do know I just make this **** up to try and make sense of the world - its possibly all wrong

Ahh cr@p, and I've been listening to you!

I was reading Ves' comments in the UGL thread, the guy has gone from novice newbie to seasoned pro in about 18 months.

Ves · 2 December 2013

craft said:
You do know I just make this **** up to try and make sense of the world - its possibly all wrong

VES you woefully underestimate yourself. Young, smart, quick learner - you've got it all over me. If it wasn't for my inventory of lessons learned the hard way (which I'm still accumulating) I wouldn't know much at all.

VSntchr said:
+1. I'll second that.

McLovin said:
Ahh cr@p, and I've been listening to you!

I was reading Ves' comments in the UGL thread, the guy has gone from novice newbie to seasoned pro in about 18 months.

Thanks guys, really means a lot. If we all learn from each other's posts it makes it well worth coming here and putting in the effort to write a few hundred words.

galumay · 2 December 2013

Ves said:
Thanks guys, really means a lot. If we all learn from each other's posts it makes it well worth coming here and putting in the effort to write a few hundred words.

Absolutely! I have learnt so much from you guys, you are all so far ahead of me in my journey and I love reading all your thoughts on valuations.

Sometimes I am a little daunted by the way that you guys delve into the complexity of corporate financials, but I try to use that as inspiration to improve my analytical skills.

oldblue · 7 February 2014

TGA's shareprice has been in a downtrend since hitting the heady heights of around $2.60 in November. Certainly, the company has forecast "only minimal growth" in the current year - and reiterated this a couple of days ago - but is the economic outlook really as dire as TGA's SP performance would imply, or is there already a degree of over-pessimism/over-selling there?

I hold a few and waiting to add when the trend reverses.

Other views?

Klogg · 7 February 2014

oldblue said:
TGA's shareprice has been in a downtrend since hitting the heady heights of around $2.60 in November. Certainly, the company has forecast "only minimal growth" in the current year - and reiterated this a couple of days ago - but is the economic outlook really as dire as TGA's SP performance would imply, or is there already a degree of over-pessimism/over-selling there?

I hold a few and waiting to add when the trend reverses.

Other views?

I'd say people were looking for growth to come sooner, and didn't like the half-yearly. That said, I'm only guessing and don't really know what others think...

That said, if this keeps going down, I will be adding also. There are a few items I want to look at first though, including:
- TEF macro outlook given SIV profit warning
- impact of lower retail margin items i.e. smartphones
- Centrepay re-work (there was a mention of this months ago, but nothing since)
and a few other things. (To be honest, they're all very small concerns)

robusta · 7 February 2014

Seems overly pessimistic to me, TGA is investing in future growth and many short term investors want growth now. For what it's worth I picked up another small parcel this morning. The dividend yield should be satisfactory while we wait for EPS growth.

tinhat · 7 February 2014

oldblue said:
TGA's shareprice has been in a downtrend since hitting the heady heights of around $2.60 in November. Certainly, the company has forecast "only minimal growth" in the current year - and reiterated this a couple of days ago - but is the economic outlook really as dire as TGA's SP performance would imply, or is there already a degree of over-pessimism/over-selling there?

I hold a few and waiting to add when the trend reverses.

Other views?

I haven't performed the sort of fundamental analysis of this business as much as some others who have posted in this thread. I hold TGA as an income stock in the SMSF. My observation is that if a company is retaining almost 50% of earnings and only paying out around 50% as dividend then you would hope that company can invest that money in growing the business to at least maintain a healthy ROE. TGA's ROE, although healthy, has been slightly declining over the past three years and is forecast to do so over the next couple of years based on fairly flat earnings growth (according to consensus forecast). Forecast dividend yield this financial year is 5.5% which grossed up to 7.86% with franking credit.

There are a few solid companies with high yields but quite modest growth outlooks to chose from as income stocks. PRT and PBG come to mind. What this company is worth comes down to a judgement on what the management can achieve long term to keep transforming this company to changing times. As electronics and home appliances become less and less expensive there is going to be less demand for consumer finance for these goods.

As I said, I hold but I think the current share price represents reasonable value the price may fall further which would give a good opportunity to pick some up. It's found a lot of support around the $2 mark in the last couple of years but the price can get move around 10% in a week.

Klogg · 7 February 2014

tinhat said:
There are a few solid companies with high yields but quite modest growth outlooks to chose from as income stocks. PRT and PBG come to mind. What this company is worth comes down to a judgement on what the management can achieve long term to keep transforming this company to changing times. As electronics and home appliances become less and less expensive there is going to be less demand for consumer finance for these goods.

While I don't know those companies very well, from a very superficial look I can say PRT and PBT aren't quite the same... PRT has far more leverage and PBT hasn't really turned a profit (again, only a superficial look, so I could be wrong).

On the topic of less demand - this is an area that management have always had a problem with... yet they keep finding ways to increase demand for their products. Store layout changes, introduction of different products and creating/rebranding businesses to deal with different markets are only a few changes that have been made. There's always some form of market research that they're conducting, and it has paid of thus far.

To be honest, it's the quality of management that really makes the difference to me (except for the price of the NCML acquisition).

skc · 7 February 2014

tinhat said:
There are a few solid companies with high yields but quite modest growth outlooks to chose from as income stocks. PRT and PBG come to mind.

I don't know if either of PRT and PBG have much growth outlook.

PBG 24 Oct

Preliminary indications are that 1H14 EBIT and NPAT (before significant items) may be materially down compared to the previous corresponding period due to trading conditions, along with increased investment, a continued downturn in the Workwear market (particularly in the Industrials sector) and the non-renewal of certain licences in HFO. However, results will be heavily dependent on 2Q14 trading which accounts for the majority of earnings in the half.

PRT 19 Nov

Assuming the current trading conditions continue, and noting the earlier comment that ad spend remains unpredictable and short, we currently expect Core NPAT for the 2014 financial year to be in the range of $31m to $33m.

Last year ~$33m.

Klogg said:
I'd say people were looking for growth to come sooner, and didn't like the half-yearly. That said, I'm only guessing and don't really know what others think...

That said, if this keeps going down, I will be adding also. There are a few items I want to look at first though, including:
- TEF macro outlook given SIV profit warning
- impact of lower retail margin items i.e. smartphones
- Centrepay re-work (there was a mention of this months ago, but nothing since)
and a few other things. (To be honest, they're all very small concerns)

There may be something to read-through from FXL's report yesterday...

Klogg · 7 February 2014

Klogg said:
PBT hasn't really turned a profit

Sorry, fatfingered it when searching. Should've searched PBG.

There may be something to read-through from FXL's report yesterday...

Thanks skc - will check it out this weekend.

tinhat · 7 February 2014

skc said:
I don't know if either of PRT and PBG have much growth outlook.

There may be something to read-through from FXL's report yesterday...

Agree about PRT and PGB not having much growth in their outlooks. I hold PRT and at the current price it is yielding 10% with imputation credits (SMSF pension phase). I consider their outlook stable in the medium term. The point I was making is that the yield on TGA isn't that high given it has a flat earnings outlook.

I don't own FXL. It's had a great run. They've made a couple of purchases recently so will check out the annual report. The consensus forecasts are for solid earnings growth.

VSntchr · 7 February 2014

The growth in FXL's earnings are coming from the interest free offering. The consumer leasing (also note that TGA is trending towards the term lease as compared to rent) has been described as flat (same as TGA has been saying).

From FXL report: Due to the challenging retail environment, the Consumer and SME (Leases)
segment’s receivables portfolio has remained largely static compared to prior year; hence the segment
partly offsets the positive performance from the rest of the business.

Also wrt to consumer leasing: Closing Receivables were $361m and remained unchanged compared to prior year. As mentioned
above, small ticket volumes have continued to fall over the last 5 years as a result of falling asset
prices and emergence of the tablet market. The increased business mix in SME has partly offset
decreases in the retail sector.

TGA - Thorn Group

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Ves

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