TGA – Thorn Group Limited

Is Thorn Group Limited really a rose between two thorns?
Thorn Group Limited ‘Thorn Group’ operates its core business in the Australian electrical and household appliance rental market under their well known Radio Rentals and Rentlo brands. Thorn Group also provides consumer cash loans through its Cashfirst brand. It provides small to medium businesses with equipment finance via its Thorn Equipment Finance division. Thorn Group also acquired National Credit Management Limited (NCML) in March 2011 mainly to operate Purchased Debt Ledgers.

Is this business easy to understand?
Thorn Group’s business is easy to understand. Thorn Group specialises in the provision of finance to consumers for electrical and household appliances. In return, it receives rental revenue which underpins the company’s stability. Thorn Group has also created new business brands within its group to create revenue via Cashfirst’s short term personal loans and rental revenue from Thorn Equipment Finance.
Thorn Group has utilized the positive cash flows from its consumer rental businesses Radio Rentals and Rentlo to achieve substantial growth in recent years. The operating cash flows have given Thorn Group a strong platform to develop new profitable related businesses such as Cashfirst and Thorn Equipment Finance.
Cashfirst provides unsecured personal loans to consumers with flexible terms and Thorn Equipment Finance specializes in providing rental finance up to about $100K for small to medium businesses and government departments. The equipment finance business is one which can be very profitable with Thorn Group using their expertise to assess risk well on a case-by-case basis.
NCML is a leading national provider of integrated receivables management.

Does this business have a sustainable competitive advantage?
Thorn Group has a long history dating back to 1937 of providing rental and finance solutions to consumers. Thorn Group’s advantage is their ability to “rent responsibly” by providing products that meet customer’s needs and budget and then manage their credit offerings and arrears very tightly. Thorn Group have reduced their bad debt arrears by close to half in the past five years. This history creates confidence in the sustainability of their business model.
Thorn Group have also used this expertise to grow their business by providing the same finance solutions to businesses and government departments. Thorn Group have grown organically via their Cashfirst and Thorn Equipment Finance businesses and have identified opportunities to grow further across all of their consumer rental, consumer loan and business finance brands.
Their Radio Rentals and Rentlo businesses enjoy strong brand awareness and give them a leadership position in the Australian consumer rental market. Radio Rentals and Rentlo generate excellent levels of cash flow and, in turn, profitability. Thorn Group announced on 22 November, 2011 that about 70% of its forecast earnings are from recurring revenue. It is this recurring revenue which creates a lot of certainty about its future and long term performance.

What are the risks facing this business?
The risks facing this business come mostly in the form of their desire to “pursue opportunities…for further growth and diversity”. The risk is that Thorn Group may overpay for an acquisition in the future. The acquisition of NCML in March 2011 has highlighted this risk of acquisition with NCML losing a contract in September 2011 with the Australian Taxation Office. Although this contract is only a small loss in comparison to Thorn Group’s total business, it does highlight the risk associated with growth and diversity.
In saying this, Thorn Group have grown within their area of expertise and have identified areas of organic growth within each of their business brands.

Is it run by able and trustworthy management?
Yes, I believe so. The current CEO and Managing Director John Hughes is an experienced CEO and has helped drive Thorn Group in its current direction. Management maintain a strong balance sheet with no net debt and the ability to fund future growth opportunities easily.

Is it trading at a bargain price?
Yes, Thorn Group’s share price closed at $1.635 on Friday, 27 January 2012 which is a 35% discount to my estimate of intrinsic value being $2.54. Noted below is a quick table summarizing the share price and my current and forecast estimates of intrinsic value:

Company Code Rank 2010 Actual 2011 Actual Today’s Share Price Margin of Safety 2012 Forecast 2013 Forecast 2014 Forecast
Thorn Group Limited TGA Gold 1 $2.55 $2.41 $1.64 35.43% $2.54 $2.71 $3.45

*Please note that these estimates of forecast intrinsic value are subject to change on a daily/weekly basis.

In summary, Thorn Group Limited is an excellent business with strong profitability, excellent cash flow, no net debt and sound management. It is trading at a discount to my estimate of intrinsic value with the current estimate of intrinsic value rising over the next couple of years.

This article is published by Dean Mico.
Disclosure: Dean Mico does own shares in Thorn Group.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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