Solid Earnings Growth To Continue For Thorn Group

This story features THORN GROUP LIMITED. For more info SHARE ANALYSIS: TGA

– Thorn Group full year result at top end of guidance
– Broader earnings base to support growth in coming years
– Brokers continue to see value at current levels

By Chris Shaw

Electrical and household appliances rental operator Thorn Group ((TGA)) yesterday delivered a record full year earnings result, the 40% increase in headline profit to $22 million broadly meeting market expectations. The result showed both top-line growth and an expansion in gross margins, reflecting "good quality".

Macquarie viewed the gross margin increase as stemming from gains derived from a stronger Australian dollar and some TV price deflation, which allowed for a reduction in the cost of sales. With rental rates likely to be adjusted to account for price deflation, Macquarie sees relatively flat margins for FY12.

Credit Suisse is also more cautious on the growth outlook for FY12, especially as there has likely been some product/price repositioning. These changes are likely to weigh on margins. On the plus side, Credit Suisse notes customer retention rates held steady in FY11, this while average payment per month per customer rose and the rental customer base broadened.

Looking ahead, Credit Suisse notes Thorn Group will enjoy a broader growth base thanks to the NCML acquisition, while increased contributions are expected from both Cashfirst and Rentlo. CashFirst is of importance as it has only now achieved a critical mass large enough to make any meaningful contribution to earnings. Losses from the BigBrownBox operations will also be removed given the closure of that division.

This leads to expectations of double digit earnings growth over the next few years, particularly as Radio Rentals increases its market penetration via the opening of new stores. Macquarie notes 5-10 additional sites are planned for FY12.

Consensus earnings per share (EPS) forecasts according to the FNArena database stand at 21.8c for FY12 and 23.9c for FY13, with Macquarie above this level given forecasts of 23.2c and 26c respectively. As RBS notes, earnings in line with consensus for FY12 would represent growth of a little more than 20%. 

Stockbroker Moelis is not in the FNArena database but is forecasting EPS for Thorn Group of 22.2c for FY12 and 24.4c for FY13. Earnings risk according to Moelis remains to the upside given the scope for additional bolt-on acquisitions and increased leverage from the opening of additional store fronts.

While Thorn Group shares have risen by 91% over the past year, brokers continue to see value. As Moelis notes, even allowing for the recent gains, Thorn Group is trading on an earnings multiple of less than 10 times for FY12.

Credit Suisse agrees, noting along with an undemanding earnings multiple Thorn Group also offers an attractive dividend yield. The yield is expected to be around 5% fully franked in FY12 and potentially as high as 6% in FY13, based on Macquarie's estimates.

The FNArena database shows a perfect three for three in Buy ratings for Thorn Group, while Moelis also rates the stock as a Buy. The consensus price target according to the database stands at $2.36, unchanged from prior to the profit result.

Shares in Thorn Group today are slightly higher, the stock up 1c at $2.09 as at 2.05pm. Over the past year Thorn Group has traded in a range of $1.105 to $2.30, the share price implying upside of around 12.5% to the consensus price target in FNArena's database.
 

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