wasting its sweetnes on the desert air

I have held Radio Rental Australia (RRA) shares in my SMSF since the second half of 2006 when I bought $10Ks worth. I increased the holding to 61,500 shares, which have an average acquisition price of 70 cents. I bought 16,700 shares for 55 cents a share in my own name earlier this year when the price dipped below 60 cents. My daughter, a trustee of my SMSF, also bought RRA in her own name a few months ago (7,700 at 68 cents). In the interest of having a balanced portfolio, I did not intend buying more RRA, but at last week’s prices I could not resist, and ordered another 18,000 at 55 cents (776 of the order still outstanding).

Holding some 100,000 RRA shares by a family like ours that is in a fairly ordinary financial position indicates that the pro-RRA views expressed below are held with conviction.

1. RRA expects an EPS at 9.1 cents, so at a PER of 11, the share would have a target price of about $1, and one can expect it to pay a dividend of 50% of the EPS, which gives a reasonable yield at a target SP of a dollar, and a damned good yield at the current SP. RRA makes good profits and it is growing, so a PER of 11 is not unreasonable.

2. RRA’s business model is counter-cyclical. When times are tough some buying intentions for consumer durables are switched to renting transactions with an option to buy later. A percentage of RRA’s customers are on welfare and they do not have mortgages, so their disposable income remains fairly constant. People who rent for non-cash-strapped reasons (for example, executives on secondment, students, retirees temporarily away from home) are not dissuaded from renting items they want for a stint.

3. RRA is effectively debt free, which suits the current investing mood.

4. RRA has very low levels of bad debts. NINJA folk who rent from RRA sign up to use Centrelink’s Centrepay facility, which can be used to cover the rental of household goods. Further, RRA has people who have rented from them for many years, and hence it has records of people who in spite of being at the bottom of the ladder have a good record of paying their debts. By the way, NINJA stands for No Income, No Job and Assets, and is used to describe the loans that led to the sub-prime mortgage fiasco in the USA.

5. In respect to the records of good payers that RRA has, RRA has recently branched into the business of making small loans to these people, who in the past used RRA as a credit reference. This gives RRA a new line of business that can be bolted onto the current network of RRA outlets at low cost.

6. RRA knows its business model and its client base well, because it has been in this business for many decades.

7. RRA has not been long listed on the ASX, and hence it is not well covered by brokers and the like, which is perhaps one reason why it has been missed by the market. Also, it is understandable that at a superficial level investors might think of RRA as a conventional retailer of consumer durables, and lump it in the same box as Clive Peeters (CPR) and others that the gurus advise investors to steer clear of in these difficult times. This undervaluation is a good thing for the long-term investor who is on the prowl for bargains. As an aside, CPR is probably a good buy at current SP, but that is another thread.

8. The Olympics would have given RRA’s business a fillip, and I suspect that a huge percentage of these items will be retained by the clients. This bodes well for the half-year report for the period ending 31 December 2008.

I am happy to hold RRA shares – I can pocket a reasonable dividend and wait for the SP to rise over the years.

One negative is that a new competitor could rock the boat in future. I am thinking of something like the franchise-based business of Mr Rental (see www.mrrental.com.au/), but I suppose there is no reason why RRA could not also follow the franchise line in future (I am not 100% sure if it is not already into franchising – I just do not recall reading as much). Another negative could be the low share-trading level, which does not bother me as a long-term holder.

Anyhow, read the last RRA Annual Report and other announcements, and you should come to the same conclusion that I hold about RRA.