TGA - Thorn Group

tinhat said:

The point I was making is that the yield on TGA isn't that high given it has a flat earnings outlook.

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I don't know (and don't care) what analysts are predicting for TGA, but after this financial year, and maybe part of next, the growth initiatives should start bearing fruit...
It won't be 20% growth, but anywhere between 5-10% should be do-able.

As for PRT - not sure I'd hold a company on the basis of yield alone...

Some people who post in this thread seem to have a lot of conviction around TGA (which I have held for several years) and this conversation seems to be somewhat subjective.

Full year results released. Revenues up, margins down, profit steady, diversification of business continuing. Share price seems about right at the moment IMHO. Decent dividend but real (ie, above inflation) growth potential of the business is yet to be proven. Federal government policies to increase social inequality may help this business though.

When I looked at the FY2014 results, the numbers looked relatively flat, but when I deducted 1HY2014 results from FY2014 to derive 2HY2014, it seemed that 1HY2014 was the low point of TGA's so-called transformation period, and that 2HY2014 showed signs of that pick-up that management often said would happen when new initiatives gained traction. I suspect that 1HY2015 will show more of that traction. If reality confirms my suspicion, Mr Market should react more positively than he did at the end of 2HY2014, because the reporting style used by listed companies tends to compare year with the previous year, and hence an improvement of a six-month period with the previous 6 months may pass unnoticed. Obviously, some businesses have a pronounced seasonality bias due to reasons like Xmas shopping, and these must be factored into one's thinking. Anyhow, let us see what the 1HY2015 metrics transpire to be. Because TGA tends to spread its profit recording over the life of the leases it writes, I think that seasonality is muted in its statutory reporting metrics.

Anyone still following this stock?

one of those stock that sit in the portfolio and never need much attention and collect dividend
I just have a quick read of the report every time they release if nothing alarming back to sleep ...

I still have them

same - held for a bit over 2 years, has returned 60% and see no reason to either buy or sell at this stage

Same, same! Will probably acquire some more now I have established my SMSF. Happy to hold.

rryall said:

Anyone still following this stock?

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Yep - but not much to comment on - steady as she goes.

Based on the P/E, it is undervalued. Technical buying signal at au stoxline.

Actually, one thing of interest. They got a shot across their bow with a first strike on the remuneration report last AGM, it will be interesting to see the vote this time - AGM is 26th Aug.

In my previous comment I mentioned that I thought that the much vaunted “traction” of various initiatives were evident in FY2014, which requires comparing 1HY2014 with 2HY2014 to notice. Additionally, if one drills down, one finds that due to the net effect of various one-offs, FY2014 compares better with FY2013 than statutory reporting suggests, and so from the underlying performance perspective, the low point was in FY2013, not FY2014. What we should see in the 1HY2015 results is more “traction”, rather than the first buds of it. In http://www.thorn.com.au/wp-content/uploads/2009/08/TGA-FY14-Full-Year-Results-Presentation.pdf you can see the following.

- - - - - - - - - - - - - - - - - FY2014 - - - - FY2013
Reported NPAT - - - - -- $28,151K - - - $28,021K
Debt Sale - - - - - - - - - - ($810K) - - - ($1,404K)
Rent Drive Buy Trial - - - - $239K - - - - - $136K
CEO Change - - - - - - - - - $500K - - - - - - - nil
New System Impact - - - - $358K - - - - - - - nil
Tax Effect - - - - - - - - - - ($86K) - - - - - $380K
Underlying NPAT - - - - $28,352K - - - $27,133K

The presentation ends with, “The continued investments in new business opportunities are expected to deliver solid NPAT growth to above $30M.”

Intuitively, to see underlying improvements in FY2014 makes sense, because the major drag on profits has been the investment in Thorn Equipment Finance (TEF), and TEF's lease book grew from $12.122M at 31/03/2012 to $46M.521M at 31/03/2013, and to $63.6M as at 31/03/2014, and hence there was a growing finance margin to cover the relatively fixed costs of the TEF team that had been set up to be supported by a $100M lease book.

A similar dynamic is occurring at Thorn Financial Services (TFS), except that the team was substantially put in position in the closing months of FY2013, so FY2014 bore the brunt of that positioning expense, and FY2015 will see TFS's loan book grow to better absorb that overhead. The other significant drag on FY2014 was the Rent-Drive-Buy trial run, but this initiative is not being pursued, so that expense should decline.

If one extracted NPAT for FY2012, FY2013 and FY2014 from Morningstar metrics, and assumed FY2015 was going to be $30.2M (i.e., above $30M), and extracted the share tallies reported for those years, and invented a tally for FY2015, you would end up with the following:

- - - - - - - - - - - - - - - - 2012/03 - - 2013/03 - - 2014/03 - - 2015/03 est
Net Profit - - - - - - - - - - $27.8M - - $28.0M - - - $28.2M - - $30.2M
Shares Outstanding - - - - 146.4M - - 147.6M - - 149.5M - - 151.0M
Share count increase - - - - - - - - - - 0.82% - - - 1.29% - - - 1.00%
EPS - - - - - - - - - - - - - - $0.190 - -- $0.190 - -- $0.189 - - $0.200

However, if you adjust the NPATs for FY2013 and FY2014 to the underlying NPATS, as detailed earlier, you get the following:

- - - - - - - - - - - - - - - - 2012/03 - - 2013/03 - - 2014/03 - - 2015/03 est
Net Profit - - - - - - - - - - $27.8M - - $27.13M - - $28.35M - - $30.2M
EPS - - - - - - - - - - - - - - $0.190 - - - $0.184 - -- $0.190 - - - $0.200

The exact metrics are not important, all I want to demonstrate is that in my view the low point was FY2013, and that the heralded traction started in FY2014. If you look at the current Thomson Consensus Estimates, the mooted EPS for FY2015 is given as $0.206. This simply flows from what can be taken from management's outlook of “above $30 million”. A ejaculated number like “above $30 million” could easily be 5% higher, and that would give an EPS of $30M*1.05/151M = $0.209, so for now, somewhere between 20 cents and 21 cents should suffice. EPS should grow by 2 cents in FY2016, and 3 cents in FY2017 (the extra cent coming from the expiry of the $1.76M annual amortisation of NCML's Customer Relations asset.

I am hoping the SP will hit $2.60 if the traction-is-happening story plays out as I suspect. Of course, it may not.

This is a nice, quiet thread - as TGA's SP climbs steadily. $2.71 today.

Disc: Holding happily.

Anyone can find any news to explain the price increases in the last few days?
Half year report is due in two weeks and I predict a 10-15% profit growth.
This has all been known for a while though with the company providing a profit forecast with the annual report.

Maybe it's just the market and traders doing their thing?

hiddencow said:

Anyone can find any news to explain the price increases in the last few days?
Half year report is due in two weeks and I predict a 10-15% profit growth.
This has all been known for a while though with the company providing a profit forecast with the annual report.

Maybe it's just the market and traders doing their thing?

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Other than the self-fulfilling prophecy of TA, nothing note-worthy.
To be honest, it's now within my valuation range and has become my largest holding, so I need to adjust accordingly.

better than expected retail figures have come out over the last few days - also called undervalued on a blog

Any opinions on the results?
Revenue growth was excellent and unlike last year we are starting to see some profit growth as well. It's a bit hard to judge as we don't have the rates of provisioning or profits recognised on inception of finance leases as opposed to over the life of the lease. It's apparent that phones have a higher level of provisioning which reduces the profit recognised on inception. Whether this is balanced out by finance income over the life of the lease or are just a lower margin product i don't know. Even at lower margins though TGA generate excellent returns as you would expect given the rental prices compared to retail purchases and I'm happy for them to keep using debt to write more leases.

Not too positive on the acquisition though. Not much has been disclosed about it yet but I would rather they use the cash to write more leases at the moment and their last acquisition didn't go to well. If you can grow your business at this rate, why not focus on it instead of an acquisition.

The commercial leasing segment is progressing nicely and we should continue to see increasing profit contributions from this segment in the next couple of years.
The consumer loans segment is a bit behind, the book and revenue have increased nicely but so have the cost base. Need another year or two until we see revenue growth without an equal cost increase for some meaningful profot contribution like with the commercial leasing segment.
NCML flat once again. Not much to say about this one. Once the amortisation from customer contracts ends in a couple of years there will be a slight boost in profit but no impact on cashflow. Won't impact segment results either as they are before amortisation.

Overall what I was expecting and a pretty good result. As long as management have remained conservative in their accounting and don't screw up another acquisition TGA should do well from here.

things are looking ok back to sleep for another 6 months and collect dividend

hiddencow said:

Any opinions on the results?

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Result looked pretty solid to me. My understanding is that we are reaching the point of the cycle where margins are starting to come under pressure. Provisioning increased from something like 11.7% of receivables to about 14.7% because they've had to take on riskier sources of debtors to both drive and maintain profitability (ie. comments about iPhones). It just means that they'll need revenue growth to tread water in the short to medium term. This will obviously turn around again at some point.

Not unhappy with the acquisition, it looks fairly cheap... I believe that the company needed a working capital injection to grow their platform which was not possible on their own standing.

Margins are down because they are provisioning more due to being inexperienced with smart phones so far. If it turns out that the provisioning was overly conservative then we'll get a big boost in profits later on.
The disclosure in the annual report is a bit lacking for provisioning. This is my understanding of how a finance lease transaction is accounted for by TGA.

The fair value of the phone is recognised as finance lease sales revenue at the start, say $800 dollars.
The cost of the phone is recognised as an expense, say $600.

The $800 is recognised as a receivable and interest revenue is recognised over time until the full undiscounted amount for the phone is received. Say $20*52*2 = $2080. So $1280 of interest revenue if the full 2 year term is completed. If the customer doesn't exercise their $1 buy option then the company would keep collecting revenue, I'm not sure if this is still recorded as interest income or it becomes operating lease income.

A provision is also recognised at the start for the expected early return or loss of products throughout the life of the contract. So the provision is not for bad debt impairments which are typically only 2% but for people who break their contract or lose their phone. TGA would receive some sort of fee in these instances and these appear to be recorded under operating lease revenues, which would explain why these revenues are so high compared to rental assets. I'm not sure if TGA take into account receipt of any fees in their provisioning levels.

This is just what I've inferred from reading their accounts, could be totally wrong. I sent some questions to clarify to the investor centre but have not received any responses yet. John Hughes was always quick to reply to my queries.

There's a lot of room for earnings manipulation in accounting for TGA's businesses but they are pretty conservative from what I see. Not much profit is recoginised up from after the cost and provision is recognised. The interest revenue over time is substantial though. If you look at the prices on their website, there shouldn't be much margin pressure there. Comparing with Mr Rentals, TGA's prices actually look cheap!

The very significant increase in receivables is a very good sign for TGA in the future.

Not a holder of TGA at the moment, but have been in the past and would not rule out joining the register again given the opportunity.

I thought the result was pretty good too. Most of what I gleaned has already been added...but an additional qualitative perspective is that my perception of management has been solidified after this result. In the 2013 period they didn't play down the fact that they were transitioning and growth had slowed down but re-assured investors that the TGA story had not finished. IMO this result shows that they still have plenty of room left to keep going and validates managements credibility.

On another note, I recall you (HiddenCow) stating you were a beginner investor in an earlier thread. Either your a very rapid learner, or there was quite a bit of modesty in that post. Your posts are always worthy of a read