A compelling bear case for Thorn Group Ltd

Via Twitter, the 10footinvestor stumbled across an interesting bear case about Thorn Group Ltd (ASX: TGA) on blogspot today. It suggests that the company will need to raise capital, and provides an interesting counterpoint to the 10foot shareholding in Thorn.

It seems to be a the blog of a ‘Mitch Dawney’ who apparently runs an activist (?) company that today made an interesting approach to AWE Limited (ASX: AWE). His posts are well written and speak for themselves:

Thorn Group (TGA) – the thorny end?

Thorn Group 2017 Annual Report

The major assertions are that the company is loading up on debt, originations are struggling, it’s inflating its headline profit, and a few other gremlins. They are thorny concerns, and fair. The gist of them, and the most compelling bear thesis for Thorn is (I quote):

“The risk is that the company becomes more leveraged by increasing corporate facilities further in an attempt to sustain the origination machine. History has shown us what happens when lenders are focused on origination revenue and lever up to satisfy sales; there is less of an equity buffer when losses from past originations eventually catch up.”

I’m fairly sanguine about some of the other concerns raised, such as the pricing caps on income, rising cost of funds, the inflation of headline profit and so on. It’s not that they are not risks – they are. Yet in my opinion the primary issues are 3 things:

  • ongoing demand for Thorn’s services (or lack, given that new leases drive profit)
  • the likelihood of increasing delinquencies
  • ability to fund ongoing business and growth

We seem to be looking at a different side of the same coin, in that (compared to him) I am under-rating the likelihood of certain risks and over-rating the likelihood of Thorn’s positive attributes.

The main goal is to ensure that, even if wrong, the 10foot portfolio suffers a minimal amount of damage on its bad investments. It is good to see a negative view on Thorn and this is something I will keep in mind. I will let you know if I change my mind on Thorn.

In other news, I received some great comments on my Henry Morgan posts, which I recommend reading if you are interested in that story. I intend to reply to the comments in a subsequent post (and will do so soon), but I have been spending my time researching another company which I recently purchased for the 10foot portfolio. You’ll be able to read about that in a week or so.

I own shares in Thorn Group. This is a disclosure and not a recommendation.

The 10footinvestor does not tweet often, but can be found @10footinvestor on Twitter for the twitterers (twits? tweople?) out there.

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