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TGA - Thorn Group

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waimate01 said:
Wow - in for a penny, in for a pound. You own almost one third of a percent of the entire company. Your holding is about double the average daily volume. That's a high conviction position!
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I would not advise others to have such a high proportion of their net wealth (about 50% in my case) in one stock, and when TGA gets closer to fair value, I'll sell some to spread the risk.

From a gambling perspective within a longish time frame (a year), what is the likelihood of TGA dropping 50 cents to come close to my buy-in price of $1.15, and what is the likelihood of it gaining 50 cents to get to about $2.20? I would say with a high level of conviction that the former is highly unlikely, and the latter close to being a certainty. I regard this gamble as being a no-brainer in favour of holding TGA in my case, and buying in for those who hold no TGA shares, or very few. The dividend to be paid over the next 8 months (January and July) will be about 10 cents (4c +6c), 100% franked, which is a real 14.3 cents, or about 12.6% annualised on an SP of $1.70 - not a bad reward while you wait for your capital gain.

A high-conviction investor can easily end up with too many eggs in one basket, but the other side of the coin is that a large investment in a stock concentrates the mind. I am gradually moving to own fewer stocks with a higher level of conviction, and ability to watch them like a hawk. Two years ago I had about 31 stocks, perhaps more, and now I have 21, and I plan to pare this number to about 15 in the next twelve months. TGA has been the best performer.
 
It seems to me that there is a fine line between "high conviction" and "falling in love with a stock" with the potential dangers inherent in the latter condition!

Good to see that you are well aware of this risk but personally I wouldn't be risking 50% of my portfolio, let alone 50% of my net worth! in one stock, however convinced I was as to its merit.
 
TGA is looking increasingly attractive to me but I admit to a few qualms regarding their recent foray into debt collection (NCML) and the increased emphasis on unsecured lending via Cashfirst where receivables have doubled in the space of 12 months. These are still comparatively small operations and I realise that TGA have considerable experience in these areas from their core leasing business, but I wouldn't want to see the finance/collection segment become too large a part of the total business in a quest for continued company growth.

Reassurance and/or comments would be appreciated.

Disc: Not yet holding.
 

I also have some qualms about their diversification strategy (or is it in fact a focusing of their expertise?..). It means capex requirements are very large ($54m in FY11 on my calculation) and so growth is only possible via debt or equity. So shares had to be issued during FY11 to reduce bank debt. I also would like to see a larger insider presence on the registry. The MD owns ~2.5% of capital but this position largely seems to have been acquired by the issuance of performance options.

On the flipside of course their rental business is a really good business.

Disc: not yet holding.
 

How did you calculate CAPEX at $54m? The biggest cash flow item is from the acquisition of rental assets. But this isn't really "CAPEX" in that they only need to buy the item once they have rented it. To oversimplify it, it's like buying a bond. The term and coupon are known from the start.
 

Page 35 n 2 of FY11 report gives capital expenditure as $54.4m.

What you are saying makes sense though: a one-off cash flow (payment for the good) is exchanged for a series of future cash flows (lease payments). This gives earnings a high degree of visibility, so $80m in operating and finance lease income is due in FY12 (n23 & 24) (right?).

On the other hand TGA has to make this investment in order to continue to generate revenue. This "CapEx figure" has been steady at 33% of revenue over the last 4 years and 80%-90% of operating cash flow. Would that be because this is the level management thinks it is prudent to grow?
 

Right.


Sure but in some way this goes back to how you view the "investment". I prefer to see it as a cost of doing business (or even customer acquisition costs if you want to be more abstract). The investment is only made when a customer agrees to a rental/finance arrangement. If the company is able to deploy funds into increasing its rental base then I'm happy for it to do so, if growth slows then the annuity stream should continue to payout over the medium term (as you said it provides visibility). The difference is about the nature of the cash flow. Capital intensive (ie high CAPEX) companies tend to have high fixed costs, TGA doesn't.
 
Does anyone have experience of TGA from a customer's perspective?

My own experience is very limited and not typical but I recently hired an "extra" fridge for the duration of the Christmas season. Discovered that this couldn't be done over the phone - although I'm sure I did last year! - but required a visit to the shop. Paperwork seemed cumbersome and excessive despite paying in advance by credit card. I realise that a lot of their business is conducted with higher credit risk customers so this is probably unavoidable.

The good news, from a shareholder's point of view, is that the cost has increased 25% since last year!

Disc: Must hurry up and buy some!

 
To conduces more rigorous thinking than occurs when I swirl things in my head, I wrote a blurb on TGA for myself, which I pasted into this thread yesterday, but it did not get posted, so I'll try again.

I think it was a comment from "oldblue" that made me look at TGA again - just to ensure that I did not have a neurological block that disallowed reality to spoil my rose-coloured perspective. As for holding too many TGAs - well I am like a crayfisherman who is doing rather nicely out of his licensed crayfish pots, and who is not too troubled by his reliance on that one investment. I'll sell some TGA in 2012, but not now at today's low SP.

I had never used NPV to guesstimate a fair-value SP for a stock, so I tried it on TGA, and to do so I needed a string of dividends, which implies inventing an EPS growth scenario, and assuming dividends would be half of that. Some of the underlying qualitative and quantitative facts follow.

TGA's competence is managing creditors, especially the cash and credit constrained subset of Australian households – 1 million of them, of whom TGA has 100,000 as customers.

TGA has a healthy balance sheet, is debt averse, and except for the NCML acquisition, has self funded admirable growth since its ASX listing on 13/12/2006. NCML has disappointed management, and I think they will not go down that path again unless the case is compelling. Not surprisingly, TGA performed better than expected in the collection of money pertaining to the NCML business, but the loss of the ATO business, and TGA's difficulty in buying debt at viable prices is disappointing – to use TGA's words, “PDLs declined due to a lack of purchases in the 1st half and strong collections performance on the existing portfolio”. TGA uses “PDL” to mean Purchasing of Debt Ledgers – not Pay Day Loans, which is not the market targeted by TGA's CashFirst.

TGA's management is normally cautious, and new initiatives like CashFirst, One Person Branches (OPBs), shopping mall kiosks and Lifestyle outlets (serviced via storage depots in low-rent premises) were first tested, then progressively rolled out when they performed well, and as all the above are new, there is a great deal of roll-out still to take place. If things do not pan out well, TGA retreats – witness the sale of the Big Brown Box business. If NCML continues to disappoint, TGA will sell it, and take the one-off loss on the chin. The loss of the ATO business on price, and being outbid for PDLs suggests to me that the debt factoring business may not be a good place in which to be, but there could be a holistic synergy there that saves NCML from the chopping block. Do not exaggerate the significance of NCML, it is small relative to the whole.

TGA used to finance equipment bought by SMEs, but the venture capitalists who owned the business before the IPO sold that to get cash. Many small financiers like Beneficial Finance who used to compete with TGA in those days have been taken over, and the big boys (mainly banks) are not interested in sub-$100K loans, which is where TGA wants to be. If a large-loan opportunity falls into TGA's lap, it will handball it to a bank for a commission. This business will use one or two people to forge links with equipment vendors, whose sales force will flick financing deals to TGA Equipment Finance. Expanding Thorn Equipment Finance is business as usual that raises no concerns for me. It will add profit to the bottom line – probably not huge, but due to low fixed cost, it will be high margin business.

TGA is negotiating with a major Chinese manufacturer who wants to offer product to Australia on a rental basis, and because TGA's expertise is customer-creditor management, and it has that sausage machine established, the Chinese firm is considering outsourcing the customer-creditor management to TGA. The deal on the table does not require TGA funding for items rented, because the Chinese firm is cashed up. I think the product range is solar panels. If this deal comes to pass or not, to boost profit growth, TGA will look for opportunities to extract more value from its core competence and strong financial position.

Let us look at the 75-year-old household equipment rental business. There are about 8.5 million households in Australia, and Woolworths (WOW) sells to them all, whereas TGA has 100,000 customers, which tells me that TGA has more growth potential than WOW. I am invested in WOW, and hence I can justify investing in TGA with greater confidence, and with a bigger likelihood of a significant upside surprise.

A Lifeline report that I read said that 14.1% of Australian households classified themselves as financially stressed. The same report stated that 28% of households were financially unfit, so the 14.1% is a conservative number, and 14.1% of 8.5 million gives us over 1 million as a TGA customer demographic, and hence TGA could continue to grow as it finds ways to tap into that demographic. The recent Interim Report states that TGA grew its customers by 4%, and its profit by 5%. TGA has leeway to reach more people by expanding its OPBs, shopping mall kiosks and lifestyle outlets (two or more can be serviced via a common warehouse), and by adding suitable products to its range (dining room and lounge sets have been outstandingly successful recently – items that are included in Centrelink's list of products that can be paid for via the Centrecard facility). I wish WOW would buy out TGA, then TGA could have hundreds of kiosks, and both my WOW and TGA holdings would benefit!

I think that TGA can grow its EPS, and hence its dividend, by somewhere between 5% and 15%. Look at the history below, and decide for yourself. Because I have the metrics, I provide the EPS for WOW too. TGA's 2007 EPS has been adjusted to account for the IPO share issue. The 2012 EPS has been extrapolated from the 30/9/2011 figures, with NCML-related adjustments to recognise the loss of the ATO business and the one-off nature of some expenses recorded in H1 – e.g., interest obviated by the recent capital raising.

- - - - - - - - - - - - 2007 - - - - 2008 - - - - 2009 - - - - 2010 - - - - 2011 - - - - 2012
WOW – EPS - - - 107.8 - - - - 133.5 - - -- 149.7 - - -- 163.2 - -- - 171.5
increase - - -- - - - - - - - -- 23.84% - -- 12.13% - - - 9.02% - - - 5.09%

TGA – EPS - - - - - 5.05 - - - - - 8.3 - - - - - 9.4 - - - -- 14.9 - - -- - 16.7 - -- - 20.35
increase - - - - - - - - - - - - 62.75% - - 35.00% - - - 58.51% - - 12.08% - - - 21.86%

If growth is assumed to be 15% for YE 30/3/2013, and the growth decays by a factor of .95 each subsequent year until it stabilises at 5%, the NPV for that dividend stream is $3.90 according to my spreadsheet. If I start with 10%, I get $2.55. If I assume only 5% growth, I get about $2.00. If I use an RR of 12%, my NPV numbers change to $2.64, $1.80 and $1.40 respectively.

For my calculations of the NPV of the dividend stream, I assumed 10% growth in 2013, corroding by a factor of .95 until it plateaus at 5%. I used an RR of 10%, and the NPV worked out as $2.55. The figures are below, where the final $2.55 is the sum of the NPVs of the dividends for the individual periods when growth varied ($1.237), plus the NPV for subsequent years when growth has stabilised at the assumed 5%:

Year - EPS growth - Dividend - NPV Div - Cumulative NPV - - Final NPV
2012 - - 10.00% - - - $0.102 - - $0.093 - - - - - $0.093
2013 - - - 9.50% - - - $0.112 - - $0.093 - - - - - $0.185
2014 - - - 9.03% - - - $0.123 - - $0.092 - - - - - $0.277
BLAH BLAH BLAH
2025 - - - 5.13% - - - $0.260 - - $0.068 - - - - - $1.172
2026 - - - 5.00% - - - $0.273 - - $0.065 - - - - - $1.237 - - - - - - $2.545

These are just numbers based on assumptions, not a set of realities. Also, my spreadsheet might be flawed. Each investor, or potential investor, in TGA will have their own assumptions and calculations. If the fair-value SP is not worth $2, however one guesstimates it, I would question the underlying metrics. What the market will do in these choppy times is anybody's guess, and to a degree I do not care in the short term, because I am neither in the market to buy nor to sell right now, and I will enjoy the interim dividend in January. If the SP approaches fair value, I'll sell some simply to diversify, because I hold far too many TGA shares.
 
Further to my post today, I forgot to cover two matters pertaining to growth (TGA's economic moat, and the bullish management communications).

The term economic moat, coined by Warren Buffet, refers to a firm's ability to maintain competitive advantages to protect its long-term profits and market share. In TGA's case, there are two moats, both passable, but working in tandem sufficient to retard competition. One is the funding required to be in the rental and financing business, and the other is the unattractive nature of TGA's core competence, debt collecting. What person with a trove of cash would want to embrace the odium of being a debt collector?

TGA's management are not in the habit of exaggerating TGA's prospects, so one can attach a great deal to TGA's formal communications – for example, in a recent communication (see an extract below), note the the word “substantial” in relation to FE 30/3/2012 growth, and there is no basis to presume this is going to be a 1-year wonder:

Group

● Strong core business plus development opportunities
● Substantial recurring revenue streams generating significant operating cash

By Division

● Resilient rental business with opportunity to develop further geographically
● Continue to evolve and expand Cashfirst offerings
● Growing Equipment Finance operation
● Increased business development and marketing focus in NCML

Outlook:

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.
 
With a 30% increase in first half NPAT it seems to me that the "substantial" growth is already pretty well in the bag, barring some unforeseen circumstances.

Disc: Now a modest holder of TGA.

 
oldblue said:
With a 30% increase in first half NPAT it seems to me that the "substantial" growth is already pretty well in the bag, barring some unforeseen circumstances.

Disc: Now a modest holder of TGA.

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Actually, I was thinking longer term than YE 30/3/2012, because to do my NPV calculations I needed some basis to invent an EPS growth factor. In that respect, consider the four dot points:

● Resilient rental business with opportunity to develop further geographically
● Continue to evolve and expand Cashfirst offerings
● Growing Equipment Finance operation
● Increased business development and marketing focus in NCML

Rental (Radio Rentals and Rentlo)

The roll-out of One Person Branches has just emerged from Stage 2 (the roll-out of 4 more after the initial trialing of 1). Another 5 are slated to be rolled out quickly, and then one presumes more will follow. From memory, the original marketing plan was based on putting outlets in smaller towns that had an economic pull on surrounding smaller population centres that fell within the ambit of a localised TV broadcasting range. Likewise, the shopping mall kiosks and the lifestyle outlets (more than one served by a common low-rent delivery depot) are new initiatives that are earmarked to grow.

The dot point does not mention new product lines, but the run-away success of lounge and dining room sets suggests that TGA has broken the constraint of relying on "equipment". You can be sure that they will expand the product range to sell more to the target demographic.

CashFirst

This will grow as TGA feels more comfortable with the metrics of the unsecured loan business, and increases advertising nationally. The advertising deal TGA has negotiated is tied to results, so provided the advertising partner agrees, TGA can ramp up advertising with impunity.

Thorn Equipment Finance

The rebirthing of this line of business is hardly past parturition, so it has a way to go yet.

NCML

I am unconvinced that the debt factoring business has legs, so I do not look there for future years' growth beyond what is already locked in. However, some of the substructure of that business, the debt collecting staff and systems, could be put to other purposes, as is now under consideration with a Chinese manufacturer thinking of outsourcing its customer-creditor management to TGA.

At the end of the day, to derive a fair-value SP, what EPS growth can we assume for the future? When you have that, subjective as it is, then you can postulate what the fair-value SP is. Personally, I think we are going to be astounded on the upside in respect to TGA's performance in coming years. Do not take my opinion on the matter - think about it.

About two years ago I gave up small investments, because I found that if I only invested a few thousand dollars, I would not expend the effort and time researching, so these days, to force myself to read and digest the annual reports and other relevant material, I would not get into an investment of less than $30K. If you like a company, and you have done your research, go for broke. Take the opinion of others, mine included, with a pinch of salt. Also, the metrics one finds in various broker reports is often wrong, or misleading - one must dig a bit deeper, which is hardly worth the bother for a minor investment.
 
At the end of the day, to derive a fair-value SP, what EPS growth can we assume for the future?
Click to expand...

I appreciate your posts on TGA, Pioupiou, much more deply analytical than anything that I attempt. I get a bit worried though when you speak of future EPS growth - too reminiscent of the multitude of brokers analysts' reports that I've read over many years which invariably attempt to "calculate" future earnings growth and which almost always prove to be wide of the mark. Not their fault but the external environment has this nasty habit of upsetting our affairs and rubbishing our forecasts.

Personally, I prefer to focus on the near term and keep an eye on the TA story which usually gives a clue to a company's current performance and prospects.
 
Financial Analysis (FA) is a subjective approach – the individual inernalises the facts to arrive at a fair-value SP (or intrinsic value), and it requires long-term assumtions, which, of course, are never 100% accurate. This is why I like to detail the facts to give insight to my internalising. Technical Analysis (TA) is empathetic – the individual guesstimates how others are going to act in the stock market in the short term, so one does not have to hazard long-term guestimates.

There is always a disjoin between FA and TA share price valuations, and this may occur more in respect to TGA than other shares. This is because TGA's focus is on the cash and credit constrained demographic, which increases in bad times, and because TGA's streams of income and cash act as a buffer for revenue, profit and cashflow. Consequently, FA should tell us that the current doom and gloom stories and the woes confronting discretionary retailers should help TGA's business. However, TA tells us that investors will panic, and those wanting to buy will hold back, while many invested in TGA will want to sell.

Combining FA and TA is probably the optimal path, and my FA views, regarded with healthy scepticism and reworked to suit your views, might help you to get to that optimum – that is, accumulate a fundamentally good share at cheap prices, and sell them if you think you can buy in later at a cheaper price. I wish I had sold when I could easily have exited at $2.20, and come back in again at about $1.60

On the matter of thinking long term, FA requires long-term guestimates and a risk-adjusted required rate of return (RR) - even if not stated, they lurk in the background. Consider the approach of applying a PER of 10 to the EPS to guestimate a fair-value SP. Folk who use a PER-of-10 approach expect an EPS many years down the track, and the target PER is in fact the reciprocal of the RR, adjusted for risk and growth. ROE-based share valuation techniques tend to give point-of-time “intrinsic values”, which are only useful if one extrapolates a string of them into the future, and so one has to make guesstimates of what the ROE and the Equity Per Share are going to be in future. The most rigorous FA technique is NPV of expected dividends, which requires one to assume dividends far into the future, and to select an RR. These assumptions are never correct, but guesstimates are better than nothing, and they can be revisited, and continually altered.

As for brokers and the like getting things wrong – everybody gets forecasts wrong, except some do so more often than others. The fair-value SPs mooted are often black-box valuations, because the underlying metrics and the algorithms used are hidden, and further, they may use metrics provided by Morningstar via various channels like Comsec, and these metrics can be misleading. For instance, debt levels may refer to a date when there was a particular reason for an atypical level of debt – historical EPS numbers may refer to a situation when the number of shares was vastly different – sales metrics are misleading if the firm has a high level of operational leases – comparison with other firms in the sector may be spurious if the firm has unique characteristics (e.g., operational leases whose revenue recognition is spread over time). These four examples are true in TGA's case, and this has given rise to distortions of opinions given about TGA. Also, some metrics that are relevant are not provided by Morningstar – in TGA's case, the average months of outstanding contracts is a highly relevant metric, in my opinion.

Further, there are various algorithms used to calculate fair-value SPs. Some of these have limitations – for example, a popular formula for calculating the NPV of a dividend that grows by a constant rate in perpetuity is the initial dividend divided by (RR less growth). If growth were equal to RR, the divisor would be zero, and the NPV would be infinity, which is silly, and if growth were greater than the RR, the NPV calculated is a negative number, which is absurd. Some ROE based algorithms overvalue companies that inherently require little capital – e.g., financial advisers, because the wunderkinder with the Midas touch in such firms could leave, and the wellspring of those seductive performance metrics would evaporate, particularly if the wunderkinder cherry-pick the best staff and high-value customers, and start competitive firms. One could adjust the RR for this risk, but as most fair-value SPs mooted emanate from black-box valuations, you will not know if this risk has been factored into the RR used, or not.

If all that was required to select shares well was access to Morningstar's metrics and a few popular fair-value-SP algorithms, we would all be wealthy.

I have just looked at today's trading, and as TA may have alerted one to (because of investor reaction to gloom in Europe and bad news for many retailers), TGA's SP fell 3 cents, whereas FA tells us that TGA will keep its stellar trajectory of share-related metrics. Also, I noticed that since 6/12/2011, Investors Mutual Limited has bought 1,899,700 TGA shares to reach 9,538,833, or 6.53% of the total, so I am not alone in the view that TGA is worth having. I am sorry to carp on about TGA, but it is the only stock of the 21 that I hold where I think I have insights worth sharing, particularly because TGA has characteristics that are unusual, and therefore often misunderstood, and I hold so many that it justifies my snooping and thinking time.
 
There is a good blurb on Thorn Group Australia (TGA) written by Dean Morel who selects one stock each month, pens his thoughts, which is reviewed by his peers at Motely Fool. TGA is his January 2012 pick.

You can see part of Dean's recommendation at http://www.fool.com.au/2011/11/investing/thorn-group-limited-a-classic-stock-for-a-tough-economy/

By request, you can get the full article. Dean does not explain his logic, but he suggests TGA's intrinsic value (IV) is $2.40, which is within the range that I think is reasonable, but higher than others think, who also do not explain how they arrive at their IVs, or fair-value SPs, or whatever they call them.

As for the current SP below $1.60 - some investors equate TGA with TRS, JBH, Billabong, Kathmandu, DJS, Hervey Norman, Myers, so they want out, and traders who use TA techniques notice the trend, and exacerbate it - all of which has nothing to do with TGA as a business, and hence its IV.
 
Thanks for that, Pioupiou.

A fair bit of current SP "weakness" relates to TGA going ex 4cps div, and of course the whole market is fairly wobbly. No reason to sell but equally no rush to buy any more just yet. I'll wait for signs of a trend change before adding to my modest holding.

 
IOOF now holding about 5% does not tell us anything significant. In 2010 IOOF held about 10%. IOOF was one of the brave instos that was prepared to invest in a small company with a limited ASX history, and as TGA ticks off the years, more instos will be prepared to consider TGA, and this, plus the fact that TGA is now in the ASX top-300, should help to bring the SP closer to fair value because of increased insto interest.

The current year ending 30/3/2012 completes five full years of ASX history, and so I expect the SP to dribble upward over time, and in the meantime shareholders can enjoy the dividends, which have risen year on year.

In the four-plus years that I have been watching TGA, and read scores of opinions on TGA, I have never read a cogent case advocating selling TGA for fundamental reasons. That TGA is listed in the Retail Sector is not a fundamental reason, and neither are shareholders' shortage of cash, or that they know a better investment, or expecting the SP might fall for reasons of negative sentiment. They are, I agree, valid reasons to sell, but not what I mean by "fundamental reasons" for selling TGA if one has them in a balanced portfolio.
 

Thanks Pioupiou,

I've been reading your fundamental analysis for some time and thanks.

Technically over the last 4 months TGA has been in a range between about $1.55 and $1.78. I'm waiting for some increase in volume and a move up to jump on board.

It had retraced to last year's August lows, 50% from the low in 2010 and 38.2% from the low in 2009.

These are significant for technicians.

This is just to let you know that technically it may be due for a run up.

I rearrange my Super portfolio after every Chinese New Year, and I noticed TGA on my charts today and it was serendipity that you posted.

Best wishes for you and TGA.

gg
 
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