Whats the verdict..., page-16

I too struggled to hear what Peter Eaton had to say. This has been the case for years. He should record his presentation, and get somebody with better voice projection to broadcast it. Alternatively, the words could be delivered in writing. One of John Hughe's great strengths was his voice projection. I always find that to know what Peter has said, I have to invest the time to stop the presentation and relisten to the bits where he has dropped his voice to a whisper.

The reason why Thorn Financial Services (TFS) is only breaking even is that TGA decided about a year ago to upscale Cashfirst into a more comprehensive financial services division, with a GM and a specialist team appointed to drive the business forward. The expense of the new team will be fairly static for years, and hence as earnings grow, the percentage of this overhead will decline. There has also been the the related Thorn Money initiative, and its marketing costs.

In loose terms, new innitiatives, and sub-initiatives take about two to four years to become profitable. Even a new Radio Rentals outlet tends to lose money in Y1, break even in Y2 and become profitable in Y3. Thorn Equipment Finance (TEF) went through the same progression, with management targeting a lease book of $100M as the point when TEF would be acceptably profitable. You can be reasonably certain that in FY2016, both TEF and TFS will be making better contributions as they move into more optimal levels of income-generating assets (leases and loans). This, so-called "gaining traction" is why the EPS is projected to rise after a 3-year hiatus.

As an aside, I noticed that the NPAT forecast of above $30M for FY2015 was forecast as "underlying". The one-off cost of the CRA acquisition is excluded. The NCML acquisition cost was about $1M, so the CRA acquisition may be similar. I am tempted to think that FY2015's underlying NPAT will be $31M, and the statutory NPAT $30M.

I believe that investors should not concern themselves with TGA's cashflow - the focus should be on the wisdom of each application of funds. If building the loan book, the lease book and specialist teams to kick NCML, TEF and TFS along are deemed to be good, then we should be relaxed. Acquiring NCML was not a good deal, and I hope that misstep will not be repeated with the CRA acquisition.