Imsoniac TGA reports NPAT in the manner that allows it to pay...

Imsoniac

TGA reports NPAT in the manner that allows it to pay the least tax, and to conform to acceptable accounting standards. This produces the Reported NPAT, or Statutory NPAT. In addition, TGA provides so-called Underlying Cash NPAT metrics, and hence a different set of derived Underlying Cash metrics emerges.

Underlying Cash NPAT attempts to reverse time-shifted items from the current year, because they really belong to either the past, or the future. The word “cash” is misleading, because it is the debiting and crediting that is the issue. In FY2015 the following amounts were used to adjust Statutory NPAT to Underlying Cash NPAT:

*    TGA expensed $2,235K (legal and similar expenses) in FY2015 to acquiring CRA, and philosophically, they should be capitalised, because the benefits of owning CRA will substantially occur in future years.

• The $1,759K amortisation relates to the March 2011 acquisition of NCML. TGA is amortising over five years the asset called Customer Relations that was created to accommodate some of the $30m plus paid for NCML. FY2018 will be free of this expense, which has no affect on cash flow.
• The $363K income derived from the abandoned Rent-Try-Buy initiative is deemed to belong to an earlier period.
• $25K tax was paid this year that applied to another year.

When guesstimating future growth below, I have used Underlying Cash NPAT, and tinkered with that to handle known facts.(for example, those listed above). I grew the Underlying Cash EPS of 22.73c by the Underlying ROE of 18.9% multiplied by a retained profit percentage of 45%.

In the table below I fiddled with the estimated EPS for 2015 by reducing it by 2.4c to cover the items mentioned in the bullet points above. The 1c difference from the Statutory EPS of 20.34c is due to rounding. I used a P/E Ratio of 14 to guesstimate a share valuation that I think would tend to be reflected by the SP in each December preceding the EOY in March. I plugged in the estimated DPS based on about 50% payout in future, rounded to quarters of a cent. The payout ratios shown were retrofitted to the chosen DPS amounts, but not used in the spreadsheet calculations (55% was used, or rather the retention percentage of 100%-55% = 45%).

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
1	Underlying EPS​	Financial Year​	Adjust Est EPS​	Estimated EPS​	Estimated Valuation​	Estimated DPS​	DPS Payout Ratio​
2
3	22.73​	2015​	2.4c​	20.330​	2.846​	11.75​	57.80%​
4	24.66[/RIGHT]	2016​	1c​	23.663​	3.313​	12.00​	50.71%​
5	26.76[/RIGHT]	2017​	1c​	25.761​	3.607​	13.25​	51.43%​
6	29.04[/RIGHT]	2018​		29.037​	4.065​	14.50​	49.94%​
7	31.51[/RIGHT]	2019​		31.506​	4.411​	15.75​	50.00%​

The actuals may worse, but because I think that TGA will reduce its payout ratio to 50%, which reduction is ignored in my calculations, there is leeway for compensating improvement if the growth factor is too bullish, or the starting Underlying Cash EPS is too high.

I am guessing that recently TGA increased the dividend payout ratio from about the 50% for two reasons. One is to signal to the market that the expensing of new initiatives belied the prospects of TGA's future NPAT. The second reason may have been that the annual $1.759m amortisation expense did not reduce cash flow, so something like 1.15c per share was available for distribution – perhaps more if the amortisation were tax deductible. Amortisation of Goodwill is not tax deductible, so I am unsure what happens to the part of the NCML acquisition price called Customer Relations that is the bit being amortised.

On the matter of the declining ROE hurdle in spite of increased leverage, under the subheading, “Why was ROE set at 18.5%”, one reason advanced was stated as “The Company has expanded its services to grow but margins will be lower than when the business was primarily Radio Rentals”. This may simply be managerial cant to justify bonuses. CCP have an ROE of just above 20%, and its management expect the unsecured loan side of its business to be as profitable as the PDL side, so the same should apply to TGA's loan and PDL business. The other major initiative is TEF and the CRA factoring business recently acquired. SIV generates an ROE of 20% or higher on average, but I am unsure what would be normal for a debt factoring business like CRA. FXL usually generates an ROE above 20% too.