Fundamentals are good, page-4

Hi Floyd

TGA's EPS history is:

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
1	2008/03	2009/03	2010/03	2011/03	2012/03	2013/03	2014/03
2	8.3	9.4	14.9	16.7	19	19.1	18.9

So EPS has stalled for two years, FY2013 and FY2014. Accounting is not an exact art, so one should not put too much value on annual figures. FY2013 was worse than the 19.1c suggests, mainly because NPAT was inflated by a large sale of very old debt that occasioned a gain of $1.4 million. If you adjust the 19.1c and 18.9c metrics by deducting abnormal expenses reported in the FY2014 presentation for FY2013 and FY2014, the figures change to 18.5c in FY2013 and 19c in 2014. This calculations being:

. . . . . . . . . . . . . . . . . . . FY2013 . . . FY2014
Debt Sale . . . . . . . . . . -$1404K . . . -$810K
Rent Drive Buy Trial . . . . $36K . .. . $239K
CEO Change . . . . . . . . . . . . . . . . . . $500K
New System Impact . . . . . . .. . . . . . $358K
Tax Effect $380K . . . . . . . . . . . . . . . -$86K
Total . . . . . . . . . . . . . . . -$888K . .. . $201K

EPS value of Total . . . -0.594c. . . . 0.134c
EPS recorded . . . . . . 19.100c . . . 18.900c
EPS excl abnormals . 18.506c . . . 19.034c

Traction was evident in FY2014, and particularly in 2H when TEF had grown its lease book to $60+M, and NCML was reported to be increasing profitability after expense rationalisation, plus increased revenue.

TFS and the Rent-Drive-Buy trial were reported as being the major drags on profits in FY2014. FY2014 was substantially the year that bore the cost of transforming Cashfirst into TFS – the main expense being the appointment of a General Manager, a Marketing Manager and a Product Manager, and the introduction of systems to enable new products offered by TFS. These expenses will not grow in equal step with growth of the Loan Book, so profitability should increase as the business grows. The Rent-Drive-Buy initiative will not be pursed, because the take-up of the vehicles after the first year was too low for TGA's liking.

1HY2015 results to be available in late November will allow us to get a better feel for the magnitude of the improved business performance. Will EPS grow in this half by a similar amount as was recorded in 2HY2014 (about 1c), or will it be more, or will it be less? Management have stated that NPAT for FY2015 should be above $30M, which taking into account the bullish tone of the BRR presentation of the FY2014 results, and the facts provided to support management's optimism, suggests to me that NPAT could easily be $30M x 1.05 = $31.5M, and with 149.5M shares, that means an EPS as high as $31.5M/149.5M = $0.2107 for the current year. However, to be conservative, for now I accept the Thomson Consensus Estimates for FY2015 of 20.6c, which suggests a NPAT of $.206 x 149.5M = $30.8M for FY2015.

Yielding to my optimistic sentiments, and rounding to whole cents to give me latitude to be brave, I expect EPS in future to grow by 2 cents a year, plus 1 cent in FY2017 when the amortisation of NCML's Customer Relationship asset expires.

. . . . . . . . FY2015 . . . FY2016 . . FY2017
EPS . . . . . . 21.0c . . . . 23.0c . . . 26.0c
DPS . . . . . . 11.5c . . . . 12.5c . . . 13.0c

I used 55% dividend payout ratio, rounded to the half cent for FY2015 and FY2016, because TGA now uses 55%. Because FY2017 gets a 1c fillip from amortisation decreasing by $1,760K, which has no impact on cash flow, I reverted back to TGA's historical payout ratio of 50%. Nobody knows what management would do then, so this is a rough guesstimate.

The current Thomson Consensus Estimates are:

. . . . . . F2015 . . FY2016 . . FY2017
EPS . . . 20.6c . . . 22.7c . . . 24.8c
DPS . . . 11.3c . . . 12.3c . . . 12.9c

As an aside, for the next five years I expect TGA to limit itself to tinkering with its four existing business units, rather than indulge in any big-step reinventions or acquisitions. There is much they can do - for example, as branch leases expire, expand the outlet network using the hub-and-and satellite model; add and subtract products; increase the range of self-imported Thorn-brand products; increase the variety of lease terms offered; improve the use of IT (cloud, Web-enabled, whatever); and aim at new customer demographics. This will allow continued growth and relevance without the downside that attend big-step changes. I have over the last fifteen or so months been both a buyer and seller of TGA shares, but mainly a buyer. As of today I hold 512,150.