early morning musings on tga

I awakened at 4:00AM, so to while away the time, I wrote the following blurb. That is why it is lengthy.

Investors, analysts and traders are in the habit of writing about one SP for a stock, which they may call a target price or a fair-value price. There are many prices on both the buy side and sell side for an individual, and more for the market as a whole. For me, TGA represents value at say $2.40, but because I have a large holding and no spare cash, I may only be tempted to buy more at about $2.00 (using borrowed money). At $2.40, I may only sell 10% of my holding, and progressively more at prices higher than that, and this would vary depending on the options I had to deploy any cash realised by selling.

TGA shareholders may recall that in late January John Hughes sold 500,000 TGA at $2.182. One never knows, but this may have set $2.18 as an on-the-high-side SP in the minds of investors and traders, because the SP ranged below $2.18 for many months after then. The SP retreated to below $2.00, and I bought some more with borrowed funds. I am overweight in TGA shares and underweight in cash, so it takes a very low price to induce me to buy using borrowed funds. Readers of this post will not be in the same circumstances, and hence a higher buy-in price could be justified.

The only relatively recent analyst report of which I am aware is dated 22 May 2013, and it proffers a target price of $2.35. It can be found at:

http://www.eurekareport.com.au/broker-alerts/2525

The substantial substance of the report is:

“Target $2.35 (was $1.90). FY13 profit was in line with FY12. Revenue was up 8%. Radio Rentals put on a good show despite the weak retail trading environment, although growth continues to slow.

While the broker continues to like the company on a number of fronts, the flat FY outcome has confirmed Credit Suisse's expectations that the ongoing focus on growth across all divisions will likely continue to soften earnings in the short to medium term. Earnings are trimmed a little going forwards and the Neutral call is maintained.”

The COB 21/5/2013 SP was $2.26 – hence the neutral call.

The words “. . . focus on growth . . . soften earnings in the short to medium term.” mean that in FY2014 TGA is going to expense growth initiatives that from a philosophical viewpoint could be capitalised, and myopic Mr Market will not see through that. Consequently, an investor can have a higher fair-value price than Credit Suisse's target SP – or indeed, the investors own target SP, but he expects Mr Market will not share his view until the fruits of the “investments” are patent. Accounting treatment of firms that invest in organic growth tends to hide their performance, whereas if they invested equivalent sums to get equivalent growth via bolt-on acquisitions, the immediate-term metrics would look better, and Mr Market would wax lyrical about the results, as he did when Eddy Groves was buying bolt-ons like a drunken sailor, and ABC Learning was the ASX darling.

Many currently holding TGA understand the “coiled spring” that is germane to TGA's organic growth path, which their reluctance to sell as current low volumes indicates. Potential buyers are probably waiting for more evidence – hence their reluctance to buy.

Where is the SP heading? Stuffed if I know, but being always ready to express a view, and change it if my thinking or the revealed facts change, I'll suggest $2.40 by December 2013, and $3.00 by December 2014. Some of that “coiled spring” should be revealed via the half-year report for the period ending 30/09/2013, and by December 2014 the subsequent two half-year reports should confirm the growth-strategy-is-working story, or indicate otherwise. The current half-year report is scheduled for release on 19 November 2013.

Why would I sell $100Ks worth of TGA at $2.30 to substantially expunge a mortgage I hold at 5.4% compounded monthly, if in 16 months time I expect the SP to be worth $3.00? The value of $100,000 x (1+5.4%/12)^16 is $107,448, whereas $100,000 increased in the ratio of 3/2.3 is $130,435. And I have ignored dividends, which in their own right loosely equate to the interest I pay if one adds franking credits less my income tax on the sum, and so the SP need not hit $3.00 by December 2014 to justify my stance relative to my mortgage.