TGA - Thorn Group

[skc]

Guesstimating a target SP can be done fairly effectively by selecting a PER by which one can multiply the EPS.

Deciding on a PER is best done by considering the stock one has in mind in the company of other listed stocks. Include amongst the list the option of putting your money in a bank, which helps to inject realism into the exercise, because if you required, say, 7% to be inclined to put money in a bank, that is effectively a PER of 1 divided by 7%, or 14.3, which happens to be a fairly typical PER in the ASX500. A quick look at the PERs of a few companies gives the following this weekend (Sunday, 1 April 2012):

- Woolworths (WOW) – 14.74
- Flight Centre (FLT) – 13.57
- Monadelphous (MND) – 19.56
- Fleetwood (FWD) – 13.70
- JB-HiFi (JBH) – 9.13

From memory the two rental companies I know in the USA, Aaron's and Rent-A-Car have PERs of about 18 and 13 respectively, and TGA beats them on all relevant metrics except size.

Anyhow, if you compare all you know about TGA with alternative investments, you should be able to settle on a reasonable PER, and if you multiply it by the expected EPS of about 20 cents for YE 30/03/2012, you would have a reasonable target SP. In my case it is about $.20 x13 = $2.60. Others could end up with $.19 x 10 = $1.90. Currently, the SP is about $1.60, so there are sellers out there using a PER of about 8. I doubt if anybody expects the EPS to be less than 19 cents.

The big end of town tend to enjoy a higher PER then the smaller caps. Some PER never makes sense to me - companies like COH / CPB / WOR are good companies that always trade on PERs that seem too high (i.e. priced for perfection), while the likes of BXB, AIO trade on a high PER without being very good companies (imho).

PER is also historical and carries certain "stigma" or "momentum". What I find is that the market will much easily retate something from at PER 4 to 8, but it is a lot harder (and takes longer) to move from 8 up to 12, even though 12 may be the right number when it comes to peer analysis. And for companies like FSA / BSA, they just don't seem to shake the PE<6 valuation for years on end.

The risk imo is that the fundamentals change when you are waiting for the market to price it from 8x to 12x - so I tend to trade my fundamental investments after PE 9-10x as a trading position (i.e. start to implement price-based stops).

With TGA, I personally consider any price between $1.6 to $2.4 to be fair. With a decent yield it makes holding $1.6 looking for $2.4 a reasonably safe exercise imho.

 

[Pioupiou]

In summary, I agree with what ske wrote - particularly the closing sentence – to wit:

"With TGA, I personally consider any price between $1.6 to $2.4 to be fair. With a decent yield it makes holding $1.6 looking for $2.4 a reasonably safe exercise imho."

That is, at $1.60 you can buy in, enjoy a reasonable dividend, and have a good chance of making 50% on your investment ($1.60 to $2.40), and a near-zero chance of losing much, if anything. I would be happy with that, and the fact that I entertain the fond notion that the capital gain could be higher is not material to my advice to readers of this thread, which depending on circumstances is either, buy, hold or both.

When I originally drafted my last post it had words to the effect that the PER one would settle for required consideration of many metrics, plus "soft" information on the physical and social environments in which the companies operate. Size and liquidity are two factors to consider, which is why one would downscale TGA's PER relative to what one would do with WOW. On the other hand, TGA beats WOW on many metrics, so one would upscale the PER, and so on. WOW has more debt, but then it has been able to borrow cheaply, so there is both a negative and a positive PER-scaling factor in that. JBH has heaps of debt, which bothers me, which would incline me to lower its PER. TGA has locked-in streams of income which act as a income buffer – a reason to bump up the PER. FWD and MND are part of the China story, plus mining is exposed to political risks, and because I am currently wary of the mining industry, so relative to mining-industry plays, TGA's PER benefits from that prejudice.

What I did not detail is that future years' EPS guesstimates hugely influence the PER I would use for TGA for YE 30/03/2012. Past years EPS metrics are merely part of what occasions me to think what the future EPS metrics might be, and the momentum fallacy (after this, therefore more of the same) needs to be avoided. I think that TGA's EPS metrics for the next three or four years are going to be better than what analysts and Mr Market thinks – reasons that I'll articulate when I write my magnus opus on TGA when the annual report is released.

On EPS growth, I found looking at Rent-A-Center's metrics interesting, because in the face of plateaued revenue and profit, Rent-A-Center has grown its EPS via buybacks. It would be interesting to create a spreadsheet of EPS growth for TGA with a “growth decay” factor and a buyback factor, so that as TGA ceases to need the 50% of EPS that it now uses to fund growth, it uses that money to buyback shares, and hence keep the EPS growing, and hence the dividend growing. If one uses a set of optimistic factors and a set of pessimistic ones, the average of the two often turns out to be fairly realistic. There is an enormous amount of subjectivity in estimating a fair-value SP, which is why I think the words “intrinsic value” are misleading – dishonest even.

I have looked at FSA and BSA with interest in the past, but not having spare cash looking for a home, and tending to limit my portfolio size, I did not pursue investigating them. I'll look at them again, because their merits and demerits have faded from my memory.

I am not a trader, so I tend to rely on high-conviction investing, and not bother with stops.

 

[odds-on]

The big end of town tend to enjoy a higher PER then the smaller caps. Some PER never makes sense to me - companies like COH / CPB / WOR are good companies that always trade on PERs that seem too high (i.e. priced for perfection), while the likes of BXB, AIO trade on a high PER without being very good companies (imho).

PER is also historical and carries certain "stigma" or "momentum". What I find is that the market will much easily retate something from at PER 4 to 8, but it is a lot harder (and takes longer) to move from 8 up to 12, even though 12 may be the right number when it comes to peer analysis. And for companies like FSA / BSA, they just don't seem to shake the PE<6 valuation for years on end.

The risk imo is that the fundamentals change when you are waiting for the market to price it from 8x to 12x - so I tend to trade my fundamental investments after PE 9-10x as a trading position (i.e. start to implement price-based stops).

With TGA, I personally consider any price between $1.6 to $2.4 to be fair. With a decent yield it makes holding $1.6 looking for $2.4 a reasonably safe exercise imho.

The market performing an easy rerate from PER 4 to 8 makes sense to me, a company is going from cheap to conservatively priced (Assuming the company has sufficient earnings stability so I can use PE=8.5+0.5*G ). The PER rerate from 4 to 8 is really about whether market believes the company is going to earn money next year rather than is it going to achieve 10% growth for the next 5 years. The rerate from PER from 8 to 12 means that market has got to believe in the future growth.

IMO stocks which have a business model to grow in economic downturns such as CCV/TGA are no brainers however the problem is when there are economic downturns the market demands a higher discount rate, therefore to make a nice profit you actually have to buy them with a PER 5-7 and start selling near PER 10-12. They are never going to be considered a market darling due to the "inverse" nature of the business model.

I am interested in TGA, however I need to answer the following questions (Pioupiou probably knows the answers off the top of his head):-

What is the management EPS guidance ?
What is management accuracy rate for EPS guidance over the last 5 years?

This could be a low risk way to make a tidy 25% or so on 50% of my fund.

Cheers

Oddson.

 

[craft]

Pioupiou

Unless you are a trader and lock-in P/E re-ratings by selling and moving on to the next target then P/E re-ratings are fairly insignificant to the long term IRR. Why the fascinations in having the market re-rate in the short term?

 

[Pioupiou]

Pioupiou

Unless you are a trader and lock-in P/E re-ratings by selling and moving on to the next target then P/E re-ratings are fairly insignificant to the long term IRR. Why the fascinations in having the market re-rate in the short term?

Actually, I am not that fussed about a re-rate in the short term, because I substantially buy to hold and live off the dividend (TGA alone gives me more annual dividend than I need to sustain my lifestyle). Further, yesterday I suggested that my son buy some TGAs, so I hope the SP stays low until he has loaded up.

I only write about TGA because having so many TGA shares I have spent heaps of time understanding it as a business and as a stock worth holding. I rarely mention the other 19 stocks that I hold, because I do not feel I can contribute much of value there.

When I write target PER, I could just as easily have conveyed the same concepts using RRR - it is just my way of saying that for TGA is cheap relative to what I personally think it is worth, which is why I have been buying them for about five years.

 

[Pioupiou]

The market performing an easy rerate from PER 4 to 8 makes sense to me, a company is going from cheap to conservatively priced (Assuming the company has sufficient earnings stability so I can use PE=8.5+0.5*G ). The PER rerate from 4 to 8 is really about whether market believes the company is going to earn money next year rather than is it going to achieve 10% growth for the next 5 years. The rerate from PER from 8 to 12 means that market has got to believe in the future growth.

IMO stocks which have a business model to grow in economic downturns such as CCV/TGA are no brainers however the problem is when there are economic downturns the market demands a higher discount rate, therefore to make a nice profit you actually have to buy them with a PER 5-7 and start selling near PER 10-12. They are never going to be considered a market darling due to the "inverse" nature of the business model.

I am interested in TGA, however I need to answer the following questions (Pioupiou probably knows the answers off the top of his head):-

What is the management EPS guidance ?
What is management accuracy rate for EPS guidance over the last 5 years?

This could be a low risk way to make a tidy 25% or so on 50% of my fund.

Cheers

Oddson.

On the matter of growth, some 80% of TGA's customers are on welfare, and there are 3.5 million welfare recipients in Australia, so with 100,000 customers now, TGA has room to find more. Also, new lines like furniture have been very successful, with furniture being roughly on par with TGA's historical lines (whitegoods and electronic equipment) so the trick is to uncover new product lines. Outdoor furniture and nursery items (cots, change tables, car seats, bunk beds etc) are under trial currently.

TGA does not have an "inverse" business cycle - it grows in good times and bad. It is convenient to write that it is counter cyclical to drive home the message that bad times are good times for TGA, but it belies how well TGA performs in good times.

TGA did not give an earnings guidance, but in a relatively recent BRR interview David Hughes said that the brokers have it about right, so you can take it to be between 19.3 cents cents to about 20.4. When dealing in loose numbers, I use 20 cents for YE 30/03/2012. TGA tends to understate the situation - more by saying nothing, rather than by proffering low numbers.

TGA is an easy business to predict because of the fact that it has repetitive revenue and very few large customers who can distort the average. Historically, management has been accurate insofar as it has given future indications, but as I wrote above, it tends to say little, and then surprise on the up side.

Where I write EPS, I mean the normalised EPS. If TGA decides to impair goodwill, it could reduce the reported EPS, but not the normalised EPS, which should not impact the SP - but it could.

 

[GJD05]

Question, when is the next Dividend date?

 

[Pioupiou]

Question, when is the next Dividend date?

Going on last year when Friday, 17 June was the ex-div date and Friday, 22 July, was the payment date, I would suggest that Friday, 15 June, and Friday, 20 July, will be the two dates for 2012. Last year's final dividend was 4.95 cents. It could be 6 cents this year. TGA tends to pay out about 50% of EPS, so the total dividend should be about 10 cents. 4 cents was paid on 20 January, so 6 cents is a reasonable guesstimate for 20 July.

 

[kermit345]

Bought some today at $1.54 with a target price between $2.00 and $2.20 following an estimated EPS of $0.195 or above in the upcoming full year results.

I think the stock deserve a P/E of approx 11 hence my target price range. It was about this time last year where TGA achieved this P/E and beyond.

Either way even if TGA hovered at the same P/E it currently trades at, with an EPS of around $0.195 your still looking at a price increase to approx $1.80 which is a healthy gain in itself.

Guess we'll have to wait and see how this one plays out.

 

[skc]

Looking at the very short term market depth the seller is quite enthusiastic although there are substantial buys all the way down to $1.50. With the full year result coming mid May there "should" be a run up towards it if everything is fine. A trade here with $1.50 stop should offer decent reward/risk.

 

[kermit345]

Also to note is that the ex-div date is coming up as well, not that there is a huge yield on offer but may still attract some and push the price up as well. Is there any chance that the dividend could increase in line with an increasing EPS?

Essentially everywhere i've read and/or looked has a fair value / target price of approx $2.00 - is the wider market waiting for EOFY reports as confirmation of the EPS growth or is there something else a large number of people are missing?

 

[Klogg]

Essentially everywhere i've read and/or looked has a fair value / target price of approx $2.00 - is the wider market waiting for EOFY reports as confirmation of the EPS growth or is there something else a large number of people are missing?

I've been asking this exact question to myself... But after hours, possibly days of research, I've left it down to the fact that the general investor sentiment is to wait for the next set of reports to see the impact of the NCML acquisition.

 

[oldblue]

I imagine that Pipoupiou won't agree with me here but I wouldn't be buying TGA while the SP trends down, often a sign that someone knows more about a stock than I do!

Time to reassess when the trend reverses, IMO.

 

[skc]

Or just the simple fact that the market only wishes to price TGA at PE 8x or there abouts.

 

[Klogg]

I imagine that Pipoupiou won't agree with me here but I wouldn't be buying TGA while the SP trends down, often a sign that someone knows more about a stock than I do!

Time to reassess when the trend reverses, IMO.

Unless it's director selling, I can't imagine that this is the case. Otherwise, each time there is a downward trend, it'd correlate to someone knowing more than I do.

For example, take a look at how the downward trend (looking at the 1yr chart) continued in November, not long after they announced a great profit increase... Nothing to really know there, just odd behaviour in my opinion.

I'm not doubting it can't happen, just that I don't think it's very likely. (With any luck, I'll be right, lol)

 

[Klogg]

And given the announcement, I'd imagine it's just because Perpetual are dumping shares.

1,576,019 shares to be exact.

 

[Klogg]

Sorry should probably have stated that I think they're still dumping shares (that 1.5mil finished at 02/04/12)

 

[Ves]

Had a sneaky little order filled at $1.505 today. Happy with that - thanks Perpetual.

 

[Klogg]

Had a sneaky little order filled at $1.505 today. Happy with that - thanks Perpetual.

Lol, we must think alike. I just bought a few more at $1.51

I've also been listening to the interim results presentation here:
http://www.brrmedia.com/event/89694...arshall-general-manager-radio-rentals--rentlo

Their customer relations team that they talk about for the Radio Rentals business is very impressive IMO.

 

[Huskar]

Interesting blog post that makes you consider the possible downsides to what has been a great business for shareholders. TGA is not expressly mentioned but similar reasoning applies.

http://www.iifunds.com.au/bristlemouth/rent-try-buy-youre-better-loan-sharks

In summary downsides to be aware of are:

1. customers might one day wake up to the raw deal they are in fact getting from rent-try-buy schemes;

2. government takes it out of the customers' hands and regulates the industry (cf the proposed new regulations for the lending industry of which all CCV shareholders will be aware)

Would be interested to hear people's thoughts