Small Caps | May 22 2014
-Radio Rentals underpins outlook
-Newer businesses need scale
By Eva Brocklehurst
Thorn Group ((TGA)) is showing improved signs of growth. The company's core business, the well-known Radio Rentals chain, recorded 8% earnings growth in FY14 as smart phone take-up accelerated. Earnings for the group rose 6% as the newer businesses, including equipment financing and cash lending, were ramped up. Management has guided to earnings growth of 6.5% for FY15. Nevertheless, brokers are cautious as the benefits from a broadening of the company's business base will take some time to come through.
Goldman Sachs has a target of $2.40 and a Neutral rating. Thorn has a mixed track record outside of the core franchise and the broker does not think the market will re-rate the stock until the newer businesses demonstrate their credentials. This is 2-3 years away, in Goldman's opinion. Meanwhile, there should be more growth coming from the rental business with the launch of Thorn branded smart phones in FY15 and increased take-up of the new 48-month contracts for TVs and white goods.
When consumer lending and equipment finance reach a critical mass this should drive a re-rating. Goldman believes the market is ascribing little value to the receivables book. The credit management business, NCML, was boosted by a sale of bad debts. Excluding this sale, NCML earnings were up 4%. Thorn Financial Services (TFS) has launched Thorn Money as a brand to target a higher "mid prime" customer base. Bad debts increased as management staged a trial of selectively increasing loan approval rates. This trial has now ceased.
With so much still up in the air, Credit Suisse pins its outlook on Radio Rentals. There is growth emanating from the rental of furniture and new technology. The broker expects solid growth, overall, but also continued weakness in TFS and NCML. Credit Suisse considers the new initiatives are yet to reach a critical mass, as Radio Rentals remains at around 87% of earnings. The Thorn Money product will target a new customer base, providing unsecured loans up to $15,000 and secured loans up to $25,000. This venture has resulted in higher costs as well as higher receivables during FY14. The company has also set up a stand alone Cashfirst store and a solar leasing product with Ingenero.
Credit Suisse notes Thorn has a national presence, which stands it in good stead. Moreover, earnings are counter cyclical and there are medium-term growth opportunities. There is also a solid dividend yield. Regardless, the short-term risk profile is elevated because of the continued investment across all divisions and the recent underperformance of the new initiatives. Credit Suisse has a target of $2.25 and a Neutral rating.
While acknowledging the move towards a broader financial services offering, Moelis considers prospects for sustained upside are limited, despite the undemanding FY15 price/earnings ratio of 10 times. Milestones must be met to confirm the company is on track with its growth plans, given a mixed past performance, particularly with NCML. Moelis observes the smaller units are well below the necessary scale but Radio Rentals is a resilient business, being Australia's largest renter of household products. Moelis retains a Hold rating and a $2.25 target.
The company maintains a pay-out ratio of 65% and declared a final dividend of 6.5c compared with 6.0c in FY13. The dividend reinvestment plan is maintained at a 2.5% discount. Credit Suisse is the only FNArena database broker covering the stock and on its forecasts, forward dividend yields of 5.4% in FY14 and 5.9% in FY15 are implied.
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