I did not reply sooner to your 26/05/14 05:49 post, because I had planned to look at TGA's EOY results in more detail, and it made sense to write after I had done that.
The gist of what you wrote in your post is correct – finance leases are expanding faster than operating leases. Technology products have always been treated as finance leases, and the fast-growing smartphone business joins that group. Leases for TEF deals are treated as finance leases. Consequently, the trend towards finance leases is here to stay. I am uncertain how TGA accounts for $1-buy-option deals – more on this below.
The trend towards finance leases should inflate revenue and profit in the current year, but the expansion of finance leases includes lower-margin business like smartphones and other Apple and Apple-like products, plus the mishmash of deals cut by TEF. These tended to inflate revenue, but not NPAT. Current NPAT was also negatively impacted by some low-margin products warranting higher provisioning. Smartphones for instance, have a retail margin of about 10%, but TGA applies a 20% provision, so at the point when the deal is struck, statutory accounting would show a loss. It takes about three months for smartphone deals to break even, and thereafter (the next 21 months) they are very profitable, which partly explains why H1 was not good from the NPAT perspective, whereas revenue growth was good.
TGA's management should downplay the revenue growth and focus investors' attention on the growth of profit-generating assets like receivables and loan books that generate high rates of interest revenue in future years. As you pointed out, interest grew from $13 million in 2008 to $54 million.
I am fairly certain that your assumption that the interest revenue (not expense) are accounted for in operating leases on a straight line basis, whereas only the interest from finance leases are recognised separately. However, I struggled to reconcile some aspects of TGA's revenue, and had I a TGA accountant at my elbow, I would have queried why the Operating Leases Revenue of $108,041K is so high relative to rental assets of $52,664K, and relative to interest revenue of $54,343K, particularly as TFS earned $9,346K of that interest, and rental assets seems to include unleased inventory.
I think that there may be ambiguity as to how TGA treats $1-buy-option leases – their accounting treatment may partially resemble that for finance leases in that TGA increases depreciation to net out at zero on expiry of the lease terms on the basis of the average exercising of that $1-buy option, but TGA may thereafter treat the accounting as though the leases were operating leases, which includes applying the depreciation over the life of the lease. If TGA buys a product, and sells it, the retail margin is taken up front, ownership passes to the customer, and no depreciation applies. In summary, I am uncertain, what is in the Operating Leases Revenue of $108,041K.
I am not a cash-flow person, so I have not attempted to work out TGA's cash flows. Petepan should be able to comment more usefully than I can. I am more inclined to guesstimate what TGA's dividend trajectory is going to be in future, which is my main interest, and as an afterthought postulate what a fair-value share valuation such a dividend trajectory should suggest. For now, $2.45 seems a viable number, but in the next year or so this could rise considerably if we see revenue rising and expenses rising at a slower pace because:
• certain expenses should remain relatively flat as TGA digests the changes it has made to its business over the last three years ending 31/03/2014; • TGA will tinker with the profitability of the smartphone business, by offering a Thorn-brand alternative and bundling in calls; • building a history for recent initiatives will allow NPAT to draw on earlier-established profit streams to substantially offset what in effect it invests in new profit streams.
TGA Price at posting:
$2.31 Sentiment: Hold Disclosure: Held
