Regulatory threats, page-15

Insomniac

The answer is no – I have not contacted management. One reason is that the guys with whom I had some familiarity, John Hughes and Peter Eaton, are no longer there, so I would have to cultivate the current CEO and CFO to the point where they would accord me their attention. The other reason is that I simply do not see much reason to fear regulatory initiatives, and I believe the storm in a teacup will blow over as it has done in the past.

The two new appointments may have more to do with TEF's business than the old Radio Rentals style business, which is a sausage-machine-style business that I imagine would have little need for the ongoing services of two executives. A competent person who is smart enough to read and understand the NCCP Act would suffice to handle officialdom in respect to Radio Rentals & Rentlo. TGA does have a small goods rental business, and they would want to keep it, so some dollars may be expended to explain its place in the market, and how it differs from a credit contract.

On my dismissive view on regulatory initiatives, I went though the Credit Suisse report and found many errors of understanding in it. Search for every mention of TGA and Radio Rentals, and examine the context in which they are mentioned, and in most cases the facts do not support the statements and innuendos that reflect poorly on TGA as an investment. Try doing that, and I'll comment in detail on what you post on the matter.

Because we should be looking forward, what TGA did in the past is less relevant than what it now does, and will be doing in future. TGA has been entering and exiting lines of business for nearly eighty years, so if regulatory control or other reasons, render a business line, or a contract style, undesirable in the long run, TGA usually adapts to obviate the problem. For instance, for a mixture of commercial and regulatory reasons:

1. Radio Rentals and Rentlo are substantially not in the rental business;
2. Consumer Leasing division (Radio Rentals and Rentlo) is substantially not a “consumer leasing” business as defined in Australian law – it is a “consumer credit” provider;
3. Consumer Finance division has exited the small amount credit contracts (SACCs);
4. years ago TGA exited its retail business, Big Brown Box;
5. recently TGA exited its Rent-Drive-Buy initiative;
6. Smartphone business has taken a back seat after a spurt of activity in FY2014; and
7. Getting into commercial finance via TEF, and acquiring CRA was probably initiated to move TGA beyond its traditional customer demographic.

Points 1 and 2 are interesting because the trading names and the division name used by TGA gives rise to the mistaken belief that TGA is a consumer goods rental company, or as the Australian Credit Code defines such a business, a “consumer leasing” business. If you accept that TGA's Consumer Leasing division is  not substantially a “consumer leasing” business, or a “goods rental” business to use another term, then that would account for most of the instances where I disagree with the Credit Suisse report.

Points 1, 2 and 3 are examples where regulatory threats probably played a role in inducing TGA to change, although they were not the only reasons. The SACCs business, for instance, was a poor performing segment of Consumer Finance division's business, and it was minuscule.

Points 4 and 5 were exits made on simple commercial criteria – profitability was too low.

On Point 6, I never understood why TGA entered the Smartphone business, and expecting elucidation in later years proved to be illusive – not much more was said after FY2014. I think it is a slither of business that TGA does not push, and TGA would not suffer much if it evaporated. Smartphones are sold under 2-year finance leases, and as 77% of finance leases originated in H1 of FY2016 were 4-year finance leases, and many of the remaining leases would have been 3-year finance leases, the dollar value of the Smartphone contracts must be small. I suspect that with high default rates, the business would not be worth having under contracts capped at an effective interest rate of 48% per year.

Point 7 would have been driven by a mixture of commercial and regulatory reasons.