H1 results due 19 Nov, page-8

There have been a number of good responses to my original post. I'll answer them briefly, and delve into some accounting issues in a later post.

Crazypunter
I regard an annual EPS growth of 10% as good. There are about 2,000 listed stocks on the ASX, and a query via Westpac Investing listed some 130 stocks that had EPS growth greater than 10% per annum over ten years. If one culled this list for various reasons – e.g., low yield, low capitalisation, exposure to iron ore prices, et cetera, one would probably end up with a list of about twenty stocks. I would be delighted if TGA could grow by a steady 10% for many years to come, and it may do that. TGA is a 77-year-old business – it's never going to race ahead like a rocket if it substantially sticks to its knitting.

Donksy
I cannot answer your question off the top of my head, so I'll come back in a later post. I'll leave you with something over which you can mull in the interim.

It is important to have a clear understanding of the different accounting treatment and terminology that TGA applies to goods that it “sells” (which are under finance leases), and goods that it pretends to “rent” (which are under operating leases). I am uncertain to what account the items are debited prior to being leased, but Rental Assets are substantially items held by customers under operating leases, but owned by TGA. Items leased out under finance leases are treated as sold, and they cease to be in the balance sheet – the asset in the balance sheet is the finance lease (debtors). I think all Thorn Equipment Finance unit's business is effected via finance leases, so if the items supplied were originally debited as Rental Assets, the value is transferred out of Rental Assets, and part of the value credited to Finance Leases, with the difference being credited to the retail profit account.

In summary, the trading assets are: a) the Loan Book; b) Rental Assets under operating leases; c) Finance Leases (debtors in effect); and d) goods not yet leased. The last mentioned may simply be bundled in with Rental Assets – I need to investigate this.

Fat Boater
I would not classify TGA as a bad investment, but at the current SP it is close to fair value, and hence it is not a no-brainer investment. There were times in calendar 2013 and early 2014 when the SP was much lower, and I advocated buying, and I bought myself. I think the SP and investors' valuations will increase (with the usual inexplicable SP slumps) over the years in sympathy with a rising EPS and DPS. My valuation would tend to the high side of “average”, because I am fully invested, confident in the underlying business, and because TGA is an income play for me, plus there are other factors.

Klogg
Some of the points you made will be covered in the follow-up that I said that I would post. I tend not to delve into TGA's cash flow, because cash seems not to be a problem.

Petepan. I too use a DPS discount approach to value TGA. On cash flow, TGA has enough money coming in to buy stock, make loans, pay tax and fund the DPS, and because it has over 100,000 customers, one does not get the lumpiness in the supply of cash and the need for cash that happens with a few-big-deals company like NWH. This steady predictability allows me to feel comfortable focusing my attention on EPS, and the resultant DPS that TGA's payout policy delivers. TGA's predictability flows from the statistical behaviour of many small numbers.

New initiatives disrupt the steady ratios that are germane to TGA's many-small-numbers business. For instance: new teams required for new initiatives like Thorn Equipment Finance and Thorn Financial Services put a drag on profit for a few years; new branches take a few years to become profitable; and in the case of the smartphone business, the speed of take-off caused a concentration of over provisioning when there was no repayment history to dampen the effect of the initial loss caused by over provisioning. More history, the importation of Thorn-brand phones, and the bundling of telephone plans in these deals will all improve the smartphone business. The financing margin of smartphones is excellent, according to the CFO, Peter Eaton..