Regulatory Concerns Pierce Thorn’s Outlook

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

-Consumer leasing review uncertainty
-Commercial finance driving growth
-Equipment finance achieves scale
 

By Eva Brocklehurst

Thorn Group ((TGA)) delivered a consistent result in its first half but the potential for regulatory changes overshadows the stock, brokers maintain.

Radio Rentals is strong, although growth is slowing. The outlook for this division appears tougher to brokers now, although strong take-up of the 48-month contract is in evidence. The government is reviewing the consumer leasing sector and this has created uncertainty.

Commercial finance was aided by the CRA acquisition, while consumer finance struggled. Overall, first half revenue was up 7.0% with an increased dividend of 5.5c. Net receivables were up 87.6% and earnings margins improved to 18.9% from 17.3%. Impairment ratios were also seen improving in 70% of the book.

The second half should benefit from the cycling of one-off costs and Morgans expects the commercial finance division will be the driver of growth. The company is expected to adapt to any changes in the consumer leasing division but, given a maturing earnings profile, any impact on FY17, such as interest rate caps, would create a ill-timed headwind in the broker's opinion.

Goldman Sachs certainly believes regulatory risk is increasing. The broker's main concern is whether tighter credit approval criteria will constrain consumer leasing originations in the future. Goldman downgrades FY17-18 earnings forecasts by 1-3%, reflecting lower rental asset originations and assumes the company does tighten its approval criteria.

Equipment finance appears to be reaching critical mass but the broker observes other newer segments are languishing. Goldman forecasts equipment finance to exceed 20% return on equity (ROE) in FY16 driven by the use of debt and the CRA contribution. ROE in the other two new divisions remains in single digits. Goldman, not one of the eight brokers monitored daily on the FNArena database, retains a Neutral rating and $2.37 target.

Credit Suisse finds the stock's valuation attractive, but it too is concerned about regulatory risk and the potential to offset earnings momentum.

One of the recommendations from ASIC (Australian Securities and Investments Commission) was that consumer leases be subject to the same regulations as small-amount credit contracts (payday loans) and, while it appears that the majority of the company's loans are below the implied interest rate caps, the picture is not entirely clear on the full product suite.

Therefore, until the government decides on what changes will be made, if any, Credit Suisse also retains a Neutral rating. The broker has made marginal upward earnings revisions of 2-3%, because of the strong performance in commercial financing but downgrades its target to $2.15 from $2.85 because of the heightened regulatory risk.

There are three Hold ratings for Thorn on FNArena's database with the consensus target of $2.48 suggesting 23.5% upside to the last share price. The dividend yield on FY16 and FY17 estimates is 6.3% and 6.7% respectively.
 

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