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TGA - Thorn Group

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The numbers speak for itself :) about this kick ass business

THORN PROFIT INCREASES 30% & GROWTH INITITATIVES CONTRIBUTING

• NPAT up 30% to $14.3m
• Revenue up 20% to $96m
• Interim dividend 4.0 cents, up 13%
• 4% customer growth in Radio Rentals/Rentlo with continuing low arrears
• Cashfirst loan book reaches $15m
• Rapid growth in Thorn Equipment Finance
• National Credit Management Limited (NCML) contributing $3.3m EBITDA

Results

For the half year ended 30 September 2011, retail and financial services company, Thorn Group
Limited (ASX: TGA), recorded a 30% increase in net profit after tax to $14.3 million.

Revenue grew 20% to $96 million, earnings per share1
increased 19% to 10.08 cents, interim
dividend increased 13% to 4.0 cents and debt to equity remains conservative at circa 8%.

TGA increase dividend, CCP increase dividend, CCV increase dividend, FLT increase dividend, NVT increase dividend
Party on :)

I'm expecting RFG and CUP to increase dividend in the near future :)
 
Great result. Looks like NCML is starting to bear fruit. Recurring revenue is now above 70% of revenue (flicked Big Brown Box off and bought NCML). The rental business just keeps spinning out cash, even if management do make a mistake (I'm not expecting they will) the OCF is a margin of safety in itself!:D
 
I monitor a group of companies I call "Micro financials" (TGA, TSM, CCP, SIV, CLH) and they all seem to trade in such low PE despite having good history of growth and pretty decent prospects, not to mention recession-proof to some degree.

CCV would have been on the list if it wasn't for its regulation risk. And FSA is even cheaper albeit with more checkered history.

Anyone like to share their views on why that is the case?
 
skc said:
I monitor a group of companies I call "Micro financials" (TGA, TSM, CCP, SIV, CLH) and they all seem to trade in such low PE despite having good history of growth and pretty decent prospects, not to mention recession-proof to some degree.

CCV would have been on the list if it wasn't for its regulation risk. And FSA is even cheaper albeit with more checkered history.

Anyone like to share their views on why that is the case?
Click to expand...

In bear market people fly to big companies they considered safe, leaving the small caps to the brave. My portfolio is full of these guys and they paid crazy dividend each year when their big safe brother cant keep up...

I applied a very simple rule.. can WOW/BHP etc.. double my money in 5-10 years time compared to TGA? ..for WOW to double my money they have to grow to a 61B company where TGA has to go to $400m ..I think TGA road is hell a lot easier...and you probably get a lot more dividend in between..

How TGA doing in the last 2-3 years compared to WOW.. TGA on its way to double my money, WOW go no where or backward ...

you don't want too many people buying these stocks, only the free and the brave :D they becomes too expensive otherwise because of liquidity, let them all move to WOW, BHP,WES,CBA and leave these cheap small caps to us brave people...

FSA I dont like the management, they issues a lot of freebies options to themselves dont pay any dividend and they sell these free options on the market... more like a company for management to pillage.
At once stage I did have them then I see this pattern :) SOLD gone .....

I get out of stocks I feel management is in there for themselves or the facts change after I bought in...
 
Yes ROE, the TGA numbers speak for themselves, but one should always double check these things. I lost a great deal a few years ago when I bought shares in Coote Engineering, which did well on a subsequent profit announcement that later turned out to be “engineered”, and shares bought for circa $1 are now worth 10 cents. A multi-million sale, with a good margin of profit, was put through the books in the last few days of the year to an entity called Greentrains which sprung into existence only days earlier, and which had no money, and could not pay for the rolling stock it bought.

The TGA figures are substantially sound. The $3.3 million EBIT contribution from NCML would only have been $2.5 million without the ATO business, so about $800K x 70% = $560K will not be repeated going forward. $630K was written off NCML intangibles, and that expense will not be repeated going forward, which is an after-tax number of $630 x 70% - $441K. I expect the YE 30/3/2012 profit to be about $28.5 million, which divided by 146,606,000 shares is an EPS of about 19.5 cents – perhaps 20 cents if you allow about 3.33% growth. The January interim dividend is set at 4 cents, and if earlier years set a precedent, the July 2012 dividend should be about 6 cents.

You have to look at TGA's financial reports to get good historical numbers, because numbers in online brokers' sites tend to be misleading. When you know the facts, TGA has never had a reversal for many years, including its pre-listing performance.

Here are some numbers, and if they vary a bit from what you think they should be, that will be because I have attempted to normalise the metrics to account for share issues and NCML-related one-offs in this and last year.

EBIT
- 2004 - - - - 2005 - - - - 2006 - - - - - 2007 - - - - 2008 - - - - 2009 - - - - 2010 - - - - - 2011 - - - - 2012
$5,196K - - $6,837K - - $9,484K - $12,387K - $16,262K - $18,093K - - $24,612K - - $32,700K - $41,500K

Average contract term in months and rental due
- 2004 - - - - 2005 - - - - 2006 - - - - - 2007 - - - - 2008 - - - - 2009 - - - - 2010 - - - - - 2011 - - - - 2012 13.9mth - - 17.5mth - 17.9mth - - - 19.1mth - - 21.0mth - - 22.0mth -- 23.0mth - - 23.0mth - - 27.0mth
- - - - - - - - $5,564K - - $5,970K - - $6,670K - - $7,302K - - $8,103K - - $9,128K - $10,360K - $11,500K

The above is an important set of metrics, because they will inform one of thigs going downhill long before the usual metrics do so.

Return on capital
- 2004 - - - - 2005 - - - - 2006 - - - - - 2007 - - - - 2008 - - - - 2009 - - - - 2010 - - - - - 2011 - - - - 2012
- - - - - - - - - - - - - - - - - - - - - - - - 14.51% - - 17.77% - - 17.19% - - - 20.35% - - - 19.02% - - - - ???

Normalised Diluted EPS
- 2004 - - - - 2005 - - - - 2006 - - - - - 2007 - - - - 2008 - - - - 2009 - - - - 2010 - - - - - 2011 - - - - 2012
- - - - - - - - - - - - - - - - - - - - - - - - 5.05c - - - - 8.42c - - - 9.52c - - - 15.00c - - - 17.62c - - - - 19.44c

What is a quality share like TGA worth. Well, one can indulge in all sorts of valuation mathematics, but it is somewhat akin to weighing a pig to five decimal points by counterbalancing it with a rock, and guesstimating the weight of the rock. With the good business model (over 100,000 contracted revenue streams, blah, blah), good history and good metrics, you may as well take 20 cents and multiply it by any number you like between 8 and 15 to get a target SP of between $1.60 and $3.00. For starters, use the halfway point - namely, $2.30 as being reasonable.
 
I've been contemplating a re-entry into TGA for some time but for various reasons (mostly to do with a lack of available cash, unfortunately), I missed a particularly attractive point in the cycle.

However, yesterday's half-year results confirms that again TGA appears to be a stand-out performer. John Hughes' interview on Lateline Business is also an interesting summary of the company and well worth a look if it can be tracked down.

I'm hoping for a re-trace in the next few days and weeks to maximise potential gain down the track.
 
McCoy Pauley said:
I've been contemplating a re-entry into TGA for some time but for various reasons (mostly to do with a lack of available cash, unfortunately), I missed a particularly attractive point in the cycle.

However, yesterday's half-year results confirms that again TGA appears to be a stand-out performer. John Hughes' interview on Lateline Business is also an interesting summary of the company and well worth a look if it can be tracked down.

I'm hoping for a re-trace in the next few days and weeks to maximise potential gain down the track.
Click to expand...

What a bummer this matter of not having a bottomless pit of cash is. I was very tempted to borrow some more, and buy at $1.64 the day before the announcement, but I owe too much as it is, and so I tempered my instincts to buy. Whether TGA goes up or down 25 cents would not deter me from being a significant holder of TGA, so for your exclusive benefit, I hope it retraces so you can get on board, but that has to be the step backward before the great leap forward. When TGA gets to $2.30, I might sell some, but I'll bother about that when the propect arises, and in the meantime I am happy to have the dividend that increases year on year.
 
TGA remind me the day I used to lend my equipment out to people cant afford to buy or don't know where to source the goods

I make my money back after 12 times lending out and I got my equipment for FREE
Invest $1200 , lend out $100 a weekend ....

and your engineering company what a bummer ..... I usually don't invest more than 25% of my capital in one stock doesn't matter how good it is, most between 5-25% mark .....

That way I dont get wipe out due to stupid management, disasters or some other crazy event I cant foresee or have lack of knowledge.

I do have a head for spot reasonable business, ....I'm not always right but it's enough to make me decent return... you probably need to be 50% right, the other 50% you get out as soon as facts changes or hold on for recovery....the 50% you get right will make multiple times return so it more than adequate to cover the other 50% you got it wrong...

while all that going on right pick vs wrong pick you get nice dividend return and enjoy life to the max :)
 
skc said:
You probably get your chance. CCP spiked up 15% on a profit upgrade only to retrace all the way back now...
Click to expand...

Funny you bought that up in this thread.

I bought CCP a while ago for my personal account but am looking to buy for my SMSF as the price is retracing.

I bought TGA in August for my SMSF @$1.51 but am hoping to buy for my personal account if the price retraces.
 
According to FN Arena, Credit Suisse and Macquarie rate TGA as outperform with price targets of $2.00/share and $2.05/share respectively, and RBS Australia rates TGA a buy with a price target of $2.07/share (down from $2.15/share, interestingly).

Credit Suisse forecasts earnings growth of 12% in FY12.

Current consensus EPS estimate is 20.0c/share. Current consensus DPS estimate is 9.7c/share. Current consensus price target is $2.04/share.

I don't put much stock in broker targets, particularly without the benefit of reading the research underlying the broker targets, but it's interesting that three brokers rate TGA quite highly.
 
Here's the latest Macquarie research note on TGA. In case anyone is interested.
 

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McLovin said:
Here's the latest Macquarie research note on TGA. In case anyone is interested.
Click to expand...

Thanks for that - very interesting, and it set me off on another inspection of the TGA situation. I have so many TGAs that I often wonder if I have misunderstood something, but every time I pour over the facts I end up feeling very comfortable with that holding.

I compared the metrics for WOW and TGA, and it is surprising how similar they are, and on balance I think TGA is the better of the two. TGA eschews debt, which makes it a safer bet, whereas WOW leverages debt to get better ROE. TGA keeps about 50% of earnings to fund growth , which I like, whereas WOW pays about 80% of EPS as dividends. What is interesting is that WOW attracts a PER of about 13.5 currently, and more in bull-market days, whereas TGA only attracts a PER of about 9, maybe 9.5. Both sell into markets that are stable in bad times, which is good.

Below are some numbers. TGA has its YE on 30 March, so the comparable periods do not exactly match, which is why I have a double header below.

WOW - - - - - - - - - - Jun 2007 - - Jun 2008 - - Jun 2009 - - Jun 2010 - - Jun 2011
TGA -- - - - - - - - - - Mar 2007 - - Mar 2008 - - Mar 2009 - Mar 2010 - - Mar 2011

W - Book Value - - - - - $4.37 - - - - - $4.95 - - - - $5.57 - - - - $6.15 - - - - $6.24
T - Book Value - - -- - - $0.42 - - - - - $0.48 - - - - $0.53 - - - - $0.62 - - - - $0.72

W - EPS - - - - - - - - - - 107.8c - - - - 133.5c - - - 149.7c - - - - 163.2c - - - 171.5c
T - EPS - - - - - - - - - - - 5.1c * - - - - - 8.3c - - - - - 9.4c - - - - - 14.9c - - - - 16.7c

W - Dividend - - - - - - - 74.0c - - - - - 92.0c - - - 104.0c - - - - - 115.0c - - 122.0c
T - Dividend - - - - - - - - 1.0c - - - - - - 4.2c - - - - - 4.7c - - - - - - 6.2c - - - - 8.4c

W - Debt/Equity - - - - - 55.7% - - - - 44.5% - - - - 45% - - - - - 45.3% - - - 61.8%
T - Debt/Equity - - - - - 14.7% - - - - - 8.0% - - - - 8.7% - - - - - - 7.3% - - - 37.9%** (now 8%)

W - Return on capital - - 19% - - - - - 22% - - - - - 20% - - - - - - 21% - - - - - 21%
T - Return on capital% - 13% - - - -- -18% - - - - - 17% - - - - - - 24% - - - - - 17%** (NCLP)

W - Return on Equity - 24.5% - - - - 27.2% - - - - - 27% - - - - 26.7% - - - - 27.5%
T - Return on Equity - 12.0 % - - - - 17.5% - - - - 17.8% - - - - 23.8% - - - - 23.2%

*TGA floated in December 2006, so the EPS has been “adjusted” to 5.05c, rounded to 5.1 c.

** TGA acquired NCLP a few weeks before EOY using borrowed funds, and these were substantially repaid via a $30 million capital raising months later, so these figures (37.9% debt/equity and the 17% return on capital are an aberration).

If you accommodate the fact that at COB on 28/11/2011 the WOW SP was $24.21, and TGA was $1.715, or 7.08% of WOW, and you scale up the per-share metrics of EPS, Dividend and Book Value by the ratio of 100 to 7.08, I think you could conclude that TGA is the superior performer, which begs the question why WOW has an EPS of some 13.5 compared to TGA's 9. If TGA enjoyed a PER of 13.5, its SP would be about $2.70 on YE 30/03/2012 EPS projections.

On the matter of projections, I do not know WOW well enough to argue with the Morningstar projections so I'll use them, and they do look kosher. With TGA, there are four values you should bear in mind when considering projections. There was $1million spent on NCML acquisition costs in YE 30/3/2010, which brought that year's earnings back a bit, but it was a oncer. In HI of this year $630K in NCML intangibles were written off, which will not be repeated, and there was some $30 million of borrowed money used to buy NCML that attracted interest in H1, which will not be required to be paid in future. I have assumed this interest was $600K. On the other side of the coin there was $800K before tax profit contributed by the ATO business with NCML, and this will not be repeated, which reduces the basis for future projections. I have assumed a constant growth of EPS of 11%, and half that for H2 this year.

We know that the net profit after tax was $14,307K and that there are 146,606,000 shares. If I make the above adjustments I get an EPS of 20.4 cents for YE 30/3/2012. Likewise for YE 30/3/2013 I get 23.01 cents, and for YE 30/3/2014, I get 25.54 cents. This is higher than most brokers calculate. My basic logic for holding TGA is that the dividend is OK, and growing, and one day these shares will be worth $3 each – not this year nor the next, but within a few years.

I do not believe 11% growth in EPS is unreasonable, considering TGA's track record, and the fact that in the 30/9/11 ending half year report the directors mooted in the outlook statement that, “The company expects a substantial increase in earnings FY12 due to a full year contribution from NCML and solid organic earnings growth from the existing divisions‟. Also, the average residual term of TGA's rental contracts was reported to have increased from 23 to 27 months – a great deal of new business must have been inked to get a metric like that. Consequently, I am more bullish than the brokers. Of course, I could be wrong, but for now I am sitting on my large TGA holdings, and watching the business like a hawk, and looking forward to banking some $16K in fully franked dividends in January.

As an aside, Thorn Equipent Finance could do very well out of any banking crisis that buffets Australia. At the moment it has a focus on the TABs, but the unit is being rejigged to build up that model, and it could burst out in new directions like financing fit-outs of medical and dental premises to pick up the slack of reluctant banks (I just invented that possibility, so don't read to much into it). As for the Radio Rentals and Rentlo duo, they will just keep on keeping on, and the plum in the pie is that many of the contracts for household items are paid for monthly via Centrelink's Centrepay facility, which keeps defaults low.

I think a TGA share should be worth at least 10% of a WOW share, and this is what I picked up from FXArena today (28/11/2011) - “Current consensus EPS estimate is 179.4, implying annual growth of 4.6%.Current consensus DPS estimate is 127.9, implying a prospective dividend yield of 5.3%.Current consensus price target is $ 26.98, suggesting upside of 11.3% (ex-dividends).Current consensus EPS estimate suggests the PER is 13.5.” When TGA gets to to 10% of that SP, or $2.70, I'll be a happy chappy.
.
 
You make a good case for TGA, Pioupiou.

It's a stock I like too, although I'm not holding. Good business model and sound performance. But I'd be a bit careful about taking the WOW/TGA thing too far. Very different businesses; huge difference in scale; marked difference in market perception. Bear in mind Buffett's - or was it Charlie Munger's remark? - about the market's ability to remain irrational longer than one's ability to remain solvent - or words to that effect. I'm not suggesting that TGA has any problems in that regard but it's very possible that the market doesn't and won't give it the standing that you do.
 
oldblue said:
You make a good case for TGA, Pioupiou.

It's a stock I like too, although I'm not holding. Good business model and sound performance. But I'd be a bit careful about taking the WOW/TGA thing too far. Very different businesses; huge difference in scale; marked difference in market perception. Bear in mind Buffett's - or was it Charlie Munger's remark? - about the market's ability to remain irrational longer than one's ability to remain solvent - or words to that effect. I'm not suggesting that TGA has any problems in that regard but it's very possible that the market doesn't and won't give it the standing that you do.
Click to expand...

I am not a trader, so I am not too bothered about the irrationality of the market - all I want to know is whether the underlying business in which I am heavily invested is sound, and is management share-holder friendly. In other words, will I be happy three or more years hence? I write often about TGA, because articulating cases in writing helps me gather my thoughts, and because I am no longer accumulating TGA, nor contemplating selling at current prices, I am happy to share the hours and hours of consideration and research that I devote to TGA.

Of course, if I had the luxury of being a good punter, I would consider market sentiment, and I would have been able to skip out when TGA was north of $2.20, and slipped back when it retraced to $1.50, but I was not that sharp. For now, I hold. I have being buying TGA since 2007 (about two dozen individual investments), and my average buy-in price is about $1.15. I have never sold TGA, although I did try to sell some at $2.30 last year. I now have 401,000 TGA shares, so on capital appreciation alone, I am well ahead. I'll not buy any more, and I will sell some one day, but until the SP gets to at least $2.30, I'll banish the notion of selling from my mind, and enjoy the dividend.

Of course, I know the differences between WOW and TGA are not small, but then TGA does not have a peer against which it can be compared, and WOW is a better comparison than most other stocks that spring to mind, because both companies are steady earners in good or bad times. What makes TGA similar to WOW is the steadiness of income. In WOW's case it springs from their market dominance and the staple nature of what WOW sells, whereas in TGA's case it springs from the rental model of its business which puts in place contractually committed rental streams. Also, there is a considerable demographic overlap of customers - typical TGA customers buy their food and drink from WOW, and they have the odd flutter on WOW-owned poker machines (hmmm - maybe TGA could do for WOW, what it does for the TAB - i.e., finance and manage the poker machines). The point I wanted to make was that TGA is quality-wise on par with WOW, but because it is much smaller (1% the size), it is not as well supported by investors and it is a less liquid stock, and hence it has a lower PER. I think any SMSF could invest in TGA with a great deal of confidence, as I have done.
 
You make some very good points Pioupiou.

For me I have a small holding in my SMSF and I am hoping to pick up some more if "the baby gets thrown out with the bathwater" in any future volatility.
 

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