To those who are concerned that new initiatives will require CAPEX, we should be concerned if the need for CAPEX fell away. It is TGA's management's job to locate new CAPEX avenues that can translate into wellsprings of cash and profit.
The used-vehicle business will only start in 2013, and if Cashfirst and Thorn Equipment Finance are precedents, it will be rolled out slowly and without the need to raise capital. It will lose money in its early stage, just as these other initiatives did, but by then those two toddlers will be up and running.
The NCML adventure was out-of-pattern behaviour, and the subsequent knee to the groin should incline John Hughes to revert back to pattern of proceeding towards new goals in manageable steps. The knee to the groin may be the greatest benefit shareholders get from NCML, and whatever else flows from it would be a bonus.
I am writing a blurb on TGA – mainly because writing forces me to check my sources and think things through, which together help to flush out misconceptions. I paste below some of the words in my current draft that relate to what I have just written.
Introduction In essence, Thorn Group puts up cash, and gets it back via a repayment stream at a profit. It relies on its debtor-handling competence to minimise not being paid, or not having rental property returned.
Core Competence Thorn's core competence is debtor management – that is, assessing applicants seeking to commit to operating leases, financial leases and repaying loans, and then ensuring that their commitments are honoured.
Capital Drains Thorn's capital expenditure is usually predictable and smooth, because it mainly relates to funding the stock it supplies on operating leases. Consequently, if business grows slower, CAPEX self adjusts, leaving more free cash. In theory, management could keep EPS, and hence dividends, increasing by diverting the free cashflow into share buy-backs. This contrasts with mining companies that can have good profits, but they keep the profits for actual or potential CAPEX requirements, which can be very lumpy require long payback periods.
Increases in operating leases will tend to increase TGA's CAPEX, but the cost will be recouped quickly (about three years, and less time for shorter-term operating leases – for example, the recently-announced used-vehicle product line). Expanding and restyling outlets requires fit-out, so this CAPEX will continual for a few years yet.
TGA Price at posting:
$1.46 Sentiment: ST Buy Disclosure: Held
