TGA 0.00% $1.17 thorn group limited

I looked at the report tonight, and on balance, the report is...

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    I looked at the report tonight, and on balance, the report is fractionally better than I expected. There were no surprises that had not been mentioned earlier, or which could not be expected.

    It seems that the DPS for H2 is low because Management have implemented the 50% payout ratio to apply to FY17, and hence the higher ratio applied to H1 had to be compensated for to get the full year's DPS at 50% of the 16.2c EPS. If 50% is going to be the new norm for a few years, then it would only require an EPS of 17c to get a DPS of 8.5c in FY18 – TGA should do better than that.

    The tectonic shift to 48-month leases happened as soon as that option was launched three years ago, so this is the year when the longer leases manifest a dearth of lease expiries, and hence the absence of the typical near-50% renewal activity that is normal for TGA. The extra year of interest revenue is a plus, but the absence of upfront retail sales and margin contribution on contract renewals for new items is a negative. The report refers to this with the words, “. . . deferral of returning customers due to the launch of the four year contract three years ago.”

    In respect to Equipment Finance, the improvement in lease values and EBIT is good to see, but EBIT can be a misleading metric in a high-leveraged-style finance business using a secured warehouse facility, because “I” stands for “interest” that TGA must pay for funds borrowed from Westpac. Equipment Finance accounted for circa $70m increase in borrowings. A putative NPAT for each segment, even if it contains subjectivity, would be a more useful metric than EBIT metrics. The ratio of Consumer Leasing's EBIT to assets looks better than Equipment Finance's ratio (see pg 35, segment reporting), but the latter is substantially funded via a secured warehouse facility, and the liabilities of that are not shown at the segment level. I might have misunderstood this issue, so look into it yourself if you think it is relevant.

    $6.1m after tax cost has been provided for the anticipated remediation costs and penalties from the ASIC investigation into customers paying more per payment period than the Law allows, even if customers prefer to build up a buffer to handle the odd stint of financial embarrassment. The report states on this matter as follows:

    Thorn also carries credits on current customer contracts arising from overpayments made ahead of contractual obligations. Thorn has been contacting customers to offer repayment of these credit balances along with compensatory interest. These overpayments continue to accrue. Arrangements have now been agreed with Centrelink to allow for the cancellation and reduction of customer payments to reduce the further accrual of these credit balances and to allow for periodic repayment through the temporary suspension of their periodic payments.

    At year-end $10.5m was in credit and repayable to customers. As these amounts have always been held on balance sheet as liabilities, the profit and loss impact is limited to the interest component and the cost of effecting the repayments.

    ASIC’s investigation has progressed and accordingly Thorn has taken up provisions in these accounts for the expected compensation of affected customers and an anticipated penalty.

    If $10.5m was the amount customers paid ahead of the maximum legally mandated repayments, it seems that the $6.1m after tax provision is rather high to cover the interest component, the cost of effecting the repayments and an ASIC penalty. Let us see how it pans out in FY18. There is bound to be some adjustment required, so let's hope it results in a net credit to TGA's P&L accounts.
 
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