Ann: Change in substantial holding from IFL , page-29

Commoditisation is not a factor per se – for instance, TGA is doing well in mass-produced furniture. It is a problem when it occasions products to drop to trivial prices, but then TGA tends to move to the larger units of such products that suffer less margin erosion - e.g., huge display screens and large capacity whitegoods.

The why-would-I-lease argument is the wrong way to look at TGA's market demographics, which is a different demographic to the HotCopper readership. The correct way to view the situation is through the why-would-THEY-lease perspective. TGA's customers often have a top-up mentality. When acquiring a lounge suite and being told that it will require a $40 a fortnight lease payment, whereas TGA is prepared to allow them up to $50 capacity, they then top up with small items (often so-called browngoods) to max the lease commitment to the allowed capacity. When I spoke to a Radio Rentals outlet over a year ago, the manageress told me that entertainment units were very popular - not that I know what an entertainment unit is, but I imagine its some sort of I&CT (information and communication technology) fusion designed to amuse the masses.

Irrespective of unit price, TGA will always shift items that provide TV and PC functionality, but the unit lease commitment will decline as these become cheaper. There is no question that TVs and PCs are a declining percentage of TGA's business, but that is not the end of the world if replacement products can be found – as happened fifty years ago when the radio and radiogram market died.

In essence TGA's business is to manage the collection of repayment streams, and all it has to do is to ensure that these streams continue to expand at good margins of profitability. Items like furniture, whitegoods, browngoods, TVs, PCs, entertainment systems, used cars, unsecured loans and the business items supplied via TEF (poker machines, alarm systems, telephonic equipment, kitchen equipment et cetera) are simply vehicles of debt that occasion the repayment streams that TGA covets. The NCML bolt-on is an additional way to generate the collection of repayment streams by either buying debtors ledgers, or collecting debts as a service.

Wholesale margins (from directly imported Thorn-brand products) and retail margins augment the financing margins. Compression of these margins can and does occur, and TGA attempts to mitigate this by favouring lines, or subsets of lines, where margin compression is less of a factor.

John Hughes made an interesting comment in one of his more recent presentations, and that was that TGA has a multi-decade history of successfully providing finance to the bottom-end demographic, and hence it finds it relatively easier to go up the ladder to reach new demographic sets, whereas in contrast, firms with a history in the higher demographic rungs find it very difficult to step lower down the socio-economic ladder.

I am not inferring that TGA's EPS and DPS cannot and will not flatten, I am simply trying to say that TGA is not in essence a TV-cum-PC renting company. TGA is increasingly becoming a low-order finance company with a strong “collections” capability, especially in respect to the lower rungs of the socio-economic market. What I like about TGA is its timidness – to avoid margin compression it avoids heroic battles with big retailers, big financial institutions and savvy customers.

I have no doubt that I have posted all the above views in this forum before. When the interim report is published circa 21/05/2013, we will have a better basis for prognosticating what the future business performance is going to be in terms of EPS and DPS and the risks attached thereto.