Small Caps | Oct 13 2011
– Thorn Group management indicates Radio Rentals performing solidly
– New concept stores also proving successful
– Defensive earnings suggest value at current levels
– Moelis reiterates Buy rating
By Chris Shaw
Thorn Group ((TGA)),the operations of which include the Radio Rentals business, is currently rated as a Buy by all three brokers in the FNArena database to provide coverage on the stock. Moelis is not in the database but also rates Thorn Group as a Buy, seeing valuation as attractive at current levels.
Moelis's Buy rating has been reiterated following a meeting with management, the broker coming away comfortable in the view the core Radio Rentals operation continues to perform well despite the challenges posed by a tough operating environment at present.
As the Radio Rentals model is to rent essential household items, the business thrives in an uncertain environment for consumers. In the view of Moelis the defensiveness of this business was demonstrated by FY11 results, where underlying net profit after tax increased by 40%.
Management also indicated the recently introduced concepts such as kiosks in metro areas and 1-2 man branches in regional centres are proving to be successful. Moelis is positive on such moves as they offer a low cost opportunity to channel increased volumes into the existing footprint of more than 70 stores.
Moelis sees Thorn Group as on track to have 5-10 of the new concept stores opened by the end of FY12. This will help to offset the recent negative news of newly acquired National Credit Management being unsuccessful in a tender to renew a contract with the Australian Tax Office.
The financial impact of this is not overly significant in the view of Moelis, the broker estimating the contract had contributed less than $1.5 million to EBIT (earnings before interest and tax) and National Credit Management accounts for less than 15% of Thorn Group earnings.
To reflect the insights offered during the meeting with management Moelis has trimmed earnings per share (EPS) forecasts by 4% through FY14. This leaves Moelis forecasting EPS of 19.4c in FY12 and 21.3c in FY13. These estimates compare to consensus EPS estimates according to the FNArena database of 19.5c and 21.2c respectively.
Based on its EPS forecasts Moelis has set a price target on Thorn Group of $1.90, which is below the consensus price target in the FNArena database of $2.10. A Buy rating is justified according to Moelis as at current levels Thorn Group is trading on a FY12 earnings multiple of eight times.
This appears cheap given the defensive nature of Thorn's earnings. Moelis also points out Thorn Group's share price has declined by around 30% since late in February, which is seen as an over-reaction given the resiliency of earnings.
Macquarie and RBS Australia also see value at current levels, while Credit Suisse is positive on Thorn Group's solid earnings growth outlook in coming years.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
