Thorn Group Ltd (ASX: TGA) released its annual results last Friday. Being busy last week investigating other companies meant that I didn’t get a chance to look at it until now. Going forwards, I’ll likely slow down the pace of announcements regarding the companies I hold. There’s no point writing little releases about Thorn’s change of CEO, for example. If anyone wants to know that sort of info they can just read the ASX release, and if its relevant but not time-critical I can always comment on it in when i write about the results..
I’m also aiming to cut down the ‘wall of text’ that accompanied my earlier posts. With this in mind I’ve created a simple table to compare Thorn’s results:
|Thorn Group Ltd (ASX: TGA)||Thesis expectations||What actually happened||My thoughts:|
|Revenues:||Effectively flat||Up 3%||–|
|NPAT:||~$24m profit||$25m profit ($31m underlying)||–|
|Full-year dividend:||10 cents||8 cents||Is OK, was lowered to support strong growth in biz leasing|
|Consumer leasing:||Down somewhat||Revenue up 2%, EBIT down 20%||Worse than expected but acceptable|
|Equipment leasing:||Modest growth due to reallocation of resources here||Revenue up strongly, almost doubled EBIT||Far better than expectations. Stellar.|
|Delinquencies:||Effectively flat||Up slightly||Not ideal but not concerning (yet?)|
|Debt headroom:||No real change||*see below||Mixed|
|Outlook:||Flat||Outlook is ‘subdued’||–|
|Share price:||bought at $1.32||$1.15-$1.20 in recent days||–|
*Company gearing increased, but so did the securitised debt load due to the strong growth in equipment finance. I would like to see the company strengthen its balance sheet, although overall I thought the result within acceptable bounds.
“Over the medium term Radio Rental’s large and loyal customer base, prices that are already under the proposed legislative caps, and the efficient cost base will position it for industry leadership and growth.” – Thorn CEO/CFO Peter Forsberg.
In summary, the results were more or less in line with expectations, except the business division which was an obvious standout. I was mildly concerned about the talk of reputational damage to Radio Rentals, as well as the modest increase in delinquencies, although both were acceptable at this point.
Specific thoughts about the business
- Thorn’s Cashflow IT franchise finance biz appeared to be one of the leading causes of growth in the equipment finance division. I am a bit wary that the company was able to achieve such rapid growth to this group of customers. Are they not being serviced by other financiers? In general I’m deeply bearish on franchisees so I have to ask whether I’m seeing warning signs or if I’m just a negative Nancy. Will watch for signs of trouble here.
- I also found it strange that management claimed “Consumer Leasing is facing a period of transition with some short term challenges from adverse publicity, weaker general retail market conditions, the deferral of returning customers due to the launch of the 4 year contract 3 years ago” as a reason for weak leasing results.
If you switch from 3 year to 4 year leases, there will be one year where you have weaker originations, yes. But if you are leasing the same item for 4 years instead of 3 years you are getting 4 years of cash flow where previously you only received 3.
Given that the company leases its items with a pricing cap of 1.8x their annual value, they would be getting 7.2x the item value (1.8 times 4 years) instead of 5.4x. I would think in general that this would be highly favourable, since you’re getting more mileage out of the same tank, as it were. I found that comment vaguely disingenuous, (though it’s also true) and worth noting.
I’m pretty bearish on Australian finance businesses at this point. In that sense, Thorn is an edgy investment for me and it is hard not to be super-critical of it. I’ve been nit-picking probably more than is constructive.
The thesis continues to play out more or less as expected, and I continue to hold my Thorn shares.
I hold shares in Thorn Group.