Sweet dreams

Insomniac

In your last post dated 13/07/2015 you wrote, “Hopefully it goes back up to that PE of 15 again and therefore towards the $3.20 mark. With the Silly Season probably behind us, my gut feel is that it may well go to $3.20 by Xmas, and I think this will be occasioned by both a higher EPS and a higher PER.

On the EPS issue, let us dwell on the words in the outlook statement, “Thorn expects continued growth in receivables will be the basis for growth of all parts of the business.”

Substantially, TGA grows indebtedness to it by various means, including loans, buying debtors ledgers and factoring commercial invoices, and via interest and other charges TGA makes a quid over the period taken to collect the money owed. There are accounting quirks that impact revenue recognition, plus small variances to this central theme (e.g., NCML's collections as a service), but they do not meaningfully disturb the truth of the first sentence to this paragraph. I view Rental Assets as an equivalent profit generating asset to indebtedness, because statistically it behaves in a similar profit-generating manner. Contractually committed, and statistically predictable cash and profit streams substantially flow from the following profit generating assets:

.......figures in $000.................................. 2015 ......... 2014

Trade and Other Receivables
Current
Trade receivables ..................................... 2,985 ........ 4,062
Finance lease receivables ....................... 45,111 ...... 37,316
Other commercial receivables * ............ 36,532
Loan receivables .................................... 24,020 ...... 15,583
Purchased debt ledgers ............................. 8,557 ........ 3,581
Lease deposits** ................................;........ 554 ........... 564
Other receivables and prepayments** .... 11,354 ........ 7,875
... Subtotal ........................................... 129,113 ...... 68,981
Non-current
Finance lease receivables ...................... 137,630 ...... 74,033
Loan receivables ..................................... 17,036 ........ 9,689
Purchased debt ledgers .............................. 5,852 ........ 5,293
... Subtotal ............................................ 160,518 ...... 89,015
Total Trade and Other Receivables ....... 289,631 .... 157,996
Rental Assets ........................................... 52,644 ...... 33,215

Total Incl Rental Assets ....................... 342,275 .... 191,211
* These are debts factored by CRA (I think).
** These should be excluded, but it does not materially alter the big picture.

TGA has increased its profit-generating assets by about 80% during FY2015. The rule-of-thumb ratio of profit-generating assets and NPAT will shift downward for a number of reasons – for example: the cost of debt; they lower yearly profit springing from a lengthening of lease terms; the high provisioning of unsecured loans adversely impacts Y1; and the dilutive effect of extra DRP-issued shares. Whatever the final impact is, I predict that TGA should generate an EPS increase that is going to surprise the market. The current Thomson Consensus estimates are:

...........2015 .... 2016.... 2017
EPS ... 21.8 .... 23.4 ..... 27.4
DPS ... 11.8 ... 14.0 ..... 16.0

If I am correct in my prognosis, the 23.4c for 2016 may become 24.0c, and a PER of 13 would translate to an SP of 13 x 24c = $3.12. A PER of 14 would give 14 x 24c = $3.36. This is simply plucking number from the sky, so for now I'll set my target for $3.00 by Xmas, and hope for $3.30. The H1 announcements in late November (after the half-year Announcements) would be the time to consider the likelihood of these sweet dreams. Those in the inner circle, would know already what the NPAT is likely to be.

Late in calendar year 2014 I sold my 500,000+ holding down to 400,000 to get a fractionally better portfolio balance, and to offset GFC-era tax losses. However, the temptation to buy more TGA overwhelmed me, and I recently acquired another23,631 shares, as I mentioned in my last post.