TGA - Thorn Group

Miner said:

Hi Guys TGA is still a BUY by Motley Fools. But the current performance does not give the warm and fuzzy feeling to me. Still following for an opportunity if comes.

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That should give the amateur Buffetologists a nice warm feeling though.
"can we have some more numbers and ratios please sir" - no, no, not the actual price action

Boggo said:

That should give the amateur Buffetologists a nice warm feeling though.
"can we have some more numbers and ratios please sir" - no, no, not the actual price action

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Exactly what value does this post add?

craft said:

Exactly what value does this post add?

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None really craft and is not necessary I agree.
Probably a bit of tit for tat based on some quality postings elsewhere that had similiar standard of penmanship when it came to dealing with the reality of catching falling knives.

Back to TGA. Some of the postings on here really do highlight the shortcomings of some methods of analysing stocks that are in freefall.

The even scarier bit is that people are paying for services that get them to either buy or hold and nobody refers to the reality of what is happening on a daily basis

My concern here is not the review of lending standards and introduction of caps/fees. If they do cut the maximum interest rate charged, a huge amount of competition will flee (economies of scale are amplified, as the number of units sold to reach breakeven will increase).
Of greater concern to me is the ASIC review. I heard nothing of this (did I miss it?) until now, yet it covers a 3 year period.

Sure, the resulting payback to customers and/or fine is a short-term problem, but the potential law-suits from Maurice Blackburn and co. are not.

Did I miss the ASIC investigation announcement previously?

Klogg said:

Of greater concern to me is the ASIC review. I heard nothing of this (did I miss it?) until now, yet it covers a 3 year period.

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It was flagged in the 2016HY report. They took up a provision due to a potential fine from ASIC due to inconsistencies in a small number of previous customer transactions.

Sure, the resulting payback to customers and/or fine is a short-term problem, but the potential law-suits from Maurice Blackburn and co. are not.

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Civil lawsuits seeking damages for what, exactly? AFAIK they initially confessed to ASIC after their own internal review, and as part of the process have already reimbursed customers for any previous errors.

Quoted from another place,

"ASIC found that TGA had not regularly updated its credit assessment calculations to accord with the latest Henderson Poverty Index. However, it transpired that ASIC did not like the blunt use of the Henderson Poverty Index either, so discussions took place between the parties to come up with a better credit evaluation procedures and algorithms, and these discussions are ongoing. TGA does not know if ASIC is going to fine it for the breach, or not, and it has not provided for a fine. If you Google “Thorn Group”, ASIC and “Henderson Poverty” you will find information on this matter."

Ves said:

It was flagged in the 2016HY report. They took up a provision due to a potential fine from ASIC due to inconsistencies in a small number of previous customer transactions.


Civil lawsuits seeking damages for what, exactly? AFAIK they initially confessed to ASIC after their own internal review, and as part of the process have already reimbursed customers for any previous errors.

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Klogg said:

My concern here is not the review of lending standards and introduction of caps/fees. If they do cut the maximum interest rate charged, a huge amount of competition will flee (economies of scale are amplified, as the number of units sold to reach breakeven will increase).
Of greater concern to me is the ASIC review. I heard nothing of this (did I miss it?) until now, yet it covers a 3 year period.

Sure, the resulting payback to customers and/or fine is a short-term problem, but the potential law-suits from Maurice Blackburn and co. are not.

Did I miss the ASIC investigation announcement previously?

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There are two separate issues here, Overpayments through CentrePay and Credit Assessment Procedures.

Both come to light in the 2016 half yearly where we found out that Thorn had advised ASIC. The overpayment resulted in 2.8m refunded/refundable. The credit Assessment Procedures were noted in Contingent Liabilities.

From the half yearly.

Contingent Liability
Thorn’s consumer leasing business unit, Radio Rentals, while in the process of reviewing its business
processes and origination systems as part of a wider risk management and governance exercise, found
that it may have had some inconsistencies in its credit assessment procedures. Thorn is presently
undertaking a detailed examination and will remediate any adversely impacted customers where it is
relevant and proper to do so.
This process is ongoing and the quantum of this potential remediation is not able to be determined. No
provision has therefore been made in these financial statements. The amounts involved are not expected
to be material to the Group.
Thorn has advised ASIC and is working with ASIC to ensure the situation is rectified to ASIC’s
satisfaction.

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And in the Commentary

Thorn has noted a contingent liability in its accounts as a result of a concentrated focus to establish a
‘Gold Standard’ regulatory compliance framework to support the business as it continues to grow
and diversify. The program, which includes a broader risk management and governance exercise,
found that it may have had some inconsistencies in its credit assessment procedures. Thorn is
presently undertaking a detailed examination and will remediate any adversely affected customers
where it is relevant and proper to do so. While the amounts involved have not yet been determined,
Thorn does not expect them to be material. Thorn has advised ASIC and is working with ASIC to
ensure the situation is rectified to ASIC’s satisfaction.

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In the media it was reported that THORN had failed to update the quarterly increases to the Henderson Poverty Index and hence could be failing to correctly apply the requirements of the 2009 NCCP Act.

The latest report the Contingent liability wording has changed

Thorn’s consumer leasing division has been engaging with ASIC on matters pertaining to its customer credit refunds, its serviceability model and the appropriate and necessary extent of verification of items of customer income and expenditure.

In connection with that engagement, Thorn has been assisting ASIC in an investigation which ASIC has been undertaking into Thorn’s compliance with the responsible lending obligations pertaining to consumer leases under the National Consumer Credit Protection Act 2009. ASIC has informed Thorn that it is concerned about possible breaches of Thorn’s responsible lending obligations in respect of consumer leases entered into in the period 1 January 2012 to 1 May 2015. ASIC’s investigation is ongoing and Thorn is obtaining advice and considering its position in relation to ASIC’s concerns.

There are a number of potential outcomes from this engagement with ASIC, one of which is the imposition of penalties, but the outcome is not certain at this stage and accordingly Thorn has not taken up any liability in its balance sheet other than the provision for customer credit refunds and associated matters which was explained at the half year. Refunds to customers have been made and continue to be made as those customers affected are contacted and their address or banking details obtained to enable the refund.

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It appears ASIC are not overly happy with what they have seen, indicating concerns for a specific timeframe.

The appropriate and necessary extent of verification of items of customer income and expenditure has now been highlighted and that has also been a feature of TGA's submissions to the various regulatory reviews.


If you have ever read any of the submissions around assessment for credit in any of the legislative reviews, you will see there are issues and I suspect at this stage ASIC are happier to work with instead of take a stick to Thorn in getting something in place that balances the potential of exploitation against unnecessary exclusion from credit.

My level of concern on this issue is less than zero, ie I see it as a positive. Normally we don't get to see the skeletons until the bad debts have skyrocketed and bad lending practices can't be ignored anymore. Just wait for the banks lending practices to come under scrutiny - that is where ASIC should be spending their time, but politics and influence is what it is.

Boggo said:

None really craft and is not necessary I agree.
Probably a bit of tit for tat based on some quality postings elsewhere that had similiar standard of penmanship when it came to dealing with the reality of catching falling knives.

Back to TGA. Some of the postings on here really do highlight the shortcomings of some methods of analysing stocks that are in freefall.

The even scarier bit is that people are paying for services that get them to either buy or hold and nobody refers to the reality of what is happening on a daily basis

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So you were just **** stirring - you do that a lot.

Thanks craft and galumay, it looks like I may have been guilty of conflating / confusing two separate issues.

However, I see very little prospect of a class law suit being brought against Thorn, as I don't really think there are any damages.

craft said:

I too suspect the 19-21 doesn't include a contribution from TFS. I read the 2.3 as the net loss from that division and I suspect a fair bit of it is provisioning the crap out of the loan book (self interest of new CEO cleaning out this division sort of dictates that) Some of this may be clawed back in run off if the bad debts are not as bad as provisioned for. The 2.3 would have a tax effect.

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From the annual report.

Credit risk grew in-line with the growth of the loan and lease receivables in all segments, except Consumer Finance where bad debt provisioning increased as a percentage of the loan receivables due to the proposed liquidation of the book.

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Loans receivable - NOT PAST DUE decreased from 40.7M to 38.7M but provisioning increased by 1.58M

What is the link between not writing new loans and increased impairment in existing loans??

craft said:

Best Guess at normalising earnings (including Tax effect)

20M Statutory Guidance
6.7 Goodwill Impairment
1.7 Customer Contract Amort
1.0 Regulatory Review
2.0 Customer Refunds
1.6 Consumer Finance closure

I make that about 33M.

Flattish but decks cleared would be my guess.

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So they reported normalised Profit at 30.3M But customer Contract Amort is no longer included in that figure, that unambiguously flows to the bottom line next year and will increase reported Profit by 1.76M. All mention of the Regulatory review costs is gone despite noting the 0.9M in the first half - Maybe that cost is now embedded on an ongoing basis?

A new item depressing the reported figure and is not included in the adjusted figure is a 1.2M devaluation of the PDL book.

And we shant mention revenue recognition as consumer leasing swings over from operating to financial leases or near term earnings impact of provisioning when the receivables grow quickly.

Did I mention they upped their discount rate for impairment testing

Huskar said:

TGA reported last week with nothing too unexpected: Slight revenue gain to $300m and $32m EBIT. 13c EPS.

I wonder about the high debt levels of nearly $200m now on a $220m market cap (so EV of $420m).

As to the BV figure of about $200m, if you apply a 85% recovery to the $380m receivables figure then you pretty quickly get a more conservative BV of $150m (again, compare that to the $220m market cap).

EV/EBIT of 13x which seems a little on the high side though current P/E at 11x makes it look cheap.

As to regulatory risk, the government sought public submissions by 17 May and therefore you would suspect a response by late June on what changes the government will implement. Does anyone know if the election having been called changes whether or not a response is likely in that time frame?

One thing that I would very much like your folks' knowledgeable help with is: how long term does this business make money without the continual equity or debt raisings? Sure the OPCF figure is nice at $128m (6x $20m NPAT figure) but of course -ve investing cash flows of $170m more than offset this. (As an aside, interesting to note that MNY reports customer loan advances in OPCF while TGA reports in Investing CF.)

Therefore over $50m of debt needed to fund the business. How is this sustainable longer term?

Thanks in advance!

I don't see the screaming value here (apart from on the P/E figure which, as I say above, I am not fully convinced of the "E" part)

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Hi Heskings

Thanks for this post - lots in it I want to discuss - but I want to do it in dribs and drabs. Hopefully some of the above posts will give you a little bit to consider on the "E" part.

If you don't mind I'll pick up other little aspects over a series of posts to discuss.

Cheers

Huskar said:

... EV/EBIT of 13x which seems a little on the high side though current P/E at 11x makes it look cheap... I don't see the screaming value here (apart from on the P/E figure which, as I say above, I am not fully convinced of the "E" part)

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TGA is more a financing business than a retailer. Do you really think enterprise value is the appropriate metric for that kind of business?

I like TGA at around $1.40.

Huskar said:

EV/EBIT of 13x which seems a little on the high side though current P/E at 11x makes it look cheap.

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Even if you discount the potential of the latest report as an exercise in setting the bar low by the new CEO and take the bare minimum adjustments, Adjusted NPAT is 32M and Adjusted EBIT is 52M

That makes P/E 220/32 = 7
And EV/EBIT 420/52 = 8

Huskar said:

One thing that I would very much like your folks' knowledgeable help with is: how long term does this business make money without the continual equity or debt raisings? Sure the OPCF figure is nice at $128m (6x $20m NPAT figure) but of course -ve investing cash flows of $170m more than offset this. (As an aside, interesting to note that MNY reports customer loan advances in OPCF while TGA reports in Investing CF.)

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The investing cash flows include the purchase of product that will be leased (either as finance or rental) and loan originations (ie they give someone a loan). You've got to remember that TGA has to pay its suppliers today, but receives payment over 3-4 years which shows up in OCF. Loan repayments come through OCF too. The cash flow statement will always have a matching problem because a large amount of money goes out the door initially, and trickles back in monthly repayments.

Huskar said:

One thing that I would very much like your folks' knowledgeable help with is: how long term does this business make money without the continual equity or debt raisings? Sure the OPCF figure is nice at $128m (6x $20m NPAT figure) but of course -ve investing cash flows of $170m more than offset this. (As an aside, interesting to note that MNY reports customer loan advances in OPCF while TGA reports in Investing CF.)

Therefore over $50m of debt needed to fund the business. How is this sustainable longer term?

Thanks in advance!

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From the Cash Flow
TGA increased Interest Bearing Debt by 53.899M.
The borrowings financed:

Net dividends to shareholders of 12.213M (gross dividend less DRP proceeds)
Investment in the business of 41.686M (Diff between operating cash flows and investing cash flows plus increase in cash)

If we jump to the balance sheet you will see the increase in assets more than offsets the increase in debt.
Total Assets Increased by 69.427M
Total Liabilities increased by 61.382M. Those liabilities are the 53.889M in interesting bearing debt plus another 7.483M in non interest bearing liabilities.

The difference between increase in assets and liabilities is an Owners’ Equity increase of 8.045M from business operations; it would have been 14.717m if not for the impairment charge.

So TGA made for its owners this year 8.045M (14.717 ignoring the non-cash impairment) which it retained in the business and which the market will apply some multiple to determine a share price. It also paid owners 12.213M in NET dividends.

Yes it funded a lot of its 69.427M in balance sheet growth with 53.899M of new borrowings but for a finance company the structure is not real aggressive so that’s not necessarily a bad thing. 81.873M is Non-Recourse for equipment finance and the consumer lease business is actually backed by a fair bit of collateral in the form of the assets leased. (91M WDV).

This company is growing strongly – It has used up a fair bit of its debt funding headroom this year. I’m pleased to see it dump the consumer loans business – those loans had no collateral, poorer returns, a bad smell and as debt headroom is now not what it was the capital is much better directed to consumer or business leasing which is thumping along.

And now if you've stuck it out this far a little bonus to consider.

The provisioning for impairment of the consumer finance leases that range from 2-4 years are taken in the first year and reflect the risk of expected early return or loss throughout the life of the contract. In other words there is an upfront hit to profitability when the lease book grows quickly as it has in the year just gone, but it comes back when the growth rate moderates.

Take a look at note 5: unearned income on financial leases which doesn’t show up on the balance sheet but will be coming to a P&L statement near you in the not too distant future increased this year by 41.7M – what do they have to do to earn that income? Pump out some invoices (and collect it of course) in accordance with the finance leases that have already been originated.

Yep the share price is heading down with some easily seen issues (in fact I think management has kindly pointed out every issue they could lay their hands on) , but I think if you scratch the surface into the less easily seen detail this company is primed for P&L growth and when you factor that into a valuation and compare it to the current market price.............Opportunity???? But I could be wrong!!!!!!!!

Thankyou Craft and Mclovin

So, just like a bank, TGA raises funds at a certain rate and then seeks a return on those funds in excess of that rate. I suppose the issue is the source of financing - unlike a standard bank which has a lower cost stream of deposits, TGA must raise through debt or equity. Of course the more expensive financing demands a greater rate of return. Of course when these sources of financings dry up / get more expensive then that has a very direct effect on the business.
I see that the margin of financing income earned over that raised then is owner earnings, which, being positive, is clearly a good sign.

And I certainly get the benefits of the unearned income - which although netted against receivables as a liability really is quite clear future earning streams.

I did notice your comment on the increase in the discount rate used by mgmt - from 10.5% to 13.85% (same now as receivables mgmt discount rate btw) is a near 30% increase so not insignificant. Just on interpreting this properly - mgmt is thinking that return scenarios were too optimistic or is it that higher returns now required. But I note that there is no impact even so on goodwill carrying amounts. I also note that an assumed revenue growth rate for 5 years of 2.5% for consumer leasing business is not very exciting..

I agree about dumping the consumer loans business - I can see the benefit as a customer of leasing a fridge etc for a sum total that is higher than an upfront payment. But I can't see the LT consumer benefit of borrowing money short term at very high annualised rates. And what is not good for the consumer will, I think, tend to be bad for the business.
______

Learning something new every day thankyou

Ves said:

Civil lawsuits seeking damages for what, exactly? AFAIK they initially confessed to ASIC after their own internal review, and as part of the process have already reimbursed customers for any previous errors.

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I thought about this this morning, and you're spot on. I based this solely on CCV's past, which is hardly the same.

I need to think about this one in a quiet room for a while...

Klogg said:

I thought about this this morning, and you're spot on. I based this solely on CCV's past, which is hardly the same.

I need to think about this one in a quiet room for a while...

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I think it's really helpful to post scenarios / questions even if the responses / outcomes are different than you thought.

As with most things legal probably doesn't hurt to be a bit conservative and keep the unexpected in the back of your mind, either.

Ves said:

I think it's really helpful to post scenarios / questions even if the responses / outcomes are different than you thought.

As with most things legal probably doesn't hurt to be a bit conservative and keep the unexpected in the back of your mind, either.

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In trying to assess probabilities of each possible outcome I came across this

They have a list of previous investigations and subsequent actions by ASIC. Some of the Consumer Lease and SACC providers in there seem to have been in similar situations, with very minor outcomes...