Ann: Half Yearly Report and Accounts including Appendix 4D, page-39

TGA's SP of circa $1.85 today is not far away from the closing $1.92 of 14/11/2016. Investors seem to have concluded that the H1 Announcement was not as bad as a quick glance on 15/11/2016 suggested.

My forecast of an underlying F17 EPS estimate of 22c for TGA did not accord with Morningstar's relatively recent (but, pre-Announcement) decrease of its EPS estimate to 20.4c. Some weeks ago I wondered if whomever decreased the estimate knew something that I had not recognised, and so I took the pragmatic decision to assume the 1.6c difference (roughly $2.5m of reduced NPAT) could be one-offs that I had excluded from consideration. I then calculated a target price on the basis of a PER of 9, adjusted to handle the assumed one-off component as unique – that is, 9 x 20.04c – 1.6c = $1.82. By coincidence, that was the DCF&PER-based value that Morgans had put forward in its 28 April 2016 analysis – the higher DCF valuation compensated for the lower 8.5-PER-based TP valuation to average $1.82.

What I assumed for valuation purposes is not what I hoped would happen. I hoped that the H1 report would reflect trivial one-offs, and hence statutory EPS for H1 would be close enough to 11c to give Mr Market the basis for increasing estimated FY17 EPS to 22c. An improved EPS would tend to uplift the PER, so in my fanciful world, PER x EPS may have resulted in a SP of $2.00+.

Mr Market likes his arithmetic to be simple, so as long as the published Morningstar EPS estimate remains at 20.4c, and DPS at 11.5c, those are the metrics that he will tend to use to value TGA.

The value per share of the $3.1m provision to repay customers affected by using the wrong lending criteria is worth more than the 1.6c per share that I mentioned in the first paragraph – it's worth $3.1m ÷ 155.5m ≈ 2c, and so the underlying EPS was 9.8c +2c = 11.8c. If there are no further one-offs in H2, then the full-year statutory F17 EPS should be 9.8c + 11.8c = 21.6c, and the underlying EPS, 11.8c +11.8c = 23.6c. There may be one-offs in H2, so Morningstar's current EPS estimate 20.4c could remain unchanged.

Normally, I would expect H2 to be better than H1, but if TGA changes the rest of its stand-alone outlets in Sydney to the hub-and-spoke model, that will increase expenses during the period of change. The long-term effect of this is an expected improvement in Consumer Leasing turnover, and a relatively lower occupancy expense. I have no idea how long this project will take, but I suspect it would extend over about two years, and it needs to coincide with shop lease expiry dates, and other factors.

In the absence of some good news, I suspect the SP will hover in the $1.82-to-$1.88 price range. Good news may be if Morgans uplifts its valuation, and the herd (the broking fraternity) follows suit. The fully-franked dividend should attract investors looking for yield. A dividend of 11.5c and an SP of $1.85 gives a 6.2% yield, and 8.9% if franking credits are added.

For now I'll hold the TGA shares I own, and enjoy the dividend. If Scott Murdoch of Morgans publishes a November updated analysis on TGA, please let me know. Relative to Morgans clients, there may be a time lapse before the analysis is made public.