Here's the latest Macquarie research note on TGA. In case anyone is interested.
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.
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