Small Caps | Aug 09 2011
– Thorn Group sees opportunity in current macro conditions
– Meeting with management sees stockbroker Moelis retain earnings estimates
– Buy recommendation unchanged on valuation grounds
– Other brokers similarly positive
By Chris Shaw
The challenges facing the Australian retail sector have been well documented but one company seeing opportunity in current conditions is Thorn Group ((TGA)), thanks largely to the Radio Rentals division. This division rents essential household products and so tends to do well when there is any level of consumer uncertainty.
Stockbroker Moelis recently met with management of Thorn Group and post the meeting sees no reason to shift from a Buy recommendation. Overall momentum for the Radio Rentals operations remains positive, though there is some variance between different product segments.
As examples, Moelis points out while whitegoods performance has been very strong, computer rentals have softened to some extent given this is the more discretionary of the product range for Radio Rentals.
New concepts such as kiosks and small, 1-2 man branches have been successfully introduced and Moelis suggests the moves provide a low cost way to push increased volumes into the existing traditional store footprint. Management expects to have 5-10 of the new concept stores open by the end of FY12.
In the view of Moelis, the recent FY11 result highlighted the defensive nature of Thorn Group's earnings, as underlying net profit rose by 40% to $23 million. Around 40% of rental customers are on welfare, Thorn Group receiving payments directly from Centrelink.
As well, the latest discussions with management indicate the recent National Credit Management acquisition is performing as expected. This leaves Moelis to retain existing earnings forecasts for Thorn Group.
These forecasts in earnings per share terms are for outcomes of 20.2c in FY12 and 21.8c in FY13, which compares to consensus EPS estimates according to the FNArena database of 21.2c and 23.1c respectively.
While Thorn Group shares have risen 43% over the past year Moelis continues to see value given a FY12 earnings multiple based on its forecasts of around nine times. Even more supportive to the story is the defensiveness of earnings, as Moelis expects the company will be able to generate low risk EPS growth of better than 10% regardless of the macroeconomic environment.
Moelis is not alone in taking a positive view on Thorn Group's prospects, as the FNArena database shows a perfect three-for-three Buy ratings from brokers to cover the company. All agree the shares at current levels offer value, with RBS Australia also pointing to Thorn Group's solid track record and clear growth options as reasons further upside can be achieved.
The FNArena database shows a consensus price target for Thorn Group of $2.37, which compares to a $2.15 price target for Moelis. The consensus target implies share price upside of better than 33% from current levels.
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