Consumer leasing and business finance company Thorn Group Ltd (ASX: TGA) released its half-year results to the market last night. Although they were clouded by the sale of a discontinued business, Thorn managed to turn in an ok performance.
Here's what you need to know:
- Revenues rose 2.8% to $156.8 million
- Net Profit After Tax (NPAT) fell 1.4% to $15.1 million
- Interim dividend of 5.5 cents per share declared, same as last year
- Impairments (bad loans) appear to be rising modestly in core consumer division
- Gearing (net debt divided by equity) was flat at 52%
So What?
An acceptable report from Thorn, with a flat result in its core Consumer Leasing segment, and strong growth in the Equipment Finance and Consumer Finance divisions. Gains from these were almost entirely offset by the sale of the Receivables Management division, which swung from a $1 million profit in previous year to a $0.1 million loss (due to the sale) in this one.
If this division had delivered an identical performance to last year, Thorn's profit would have been up around 7%, to $16.5 million.
'Underlying' profit growth of 7% would more than justify Thorn's valuation today, and its dividend payout ratio is approximately 55% of earnings, meaning it should be sustainable. A combination of regulatory issues and rising impairments are keeping the company cheap, however.
At the half year I suggested that rising impairments on the consumer leasing segment could be statistically insignificant, yet today's announcement showed that impairment losses have risen further, from 4.3% to 4.6%. Average delinquency (unpaid for more than 30 days) is up from 6.8% to 8%.
Although this is within acceptable levels for Thorn, and I note that impairments are actually down compared to 6 months ago, investors will want to watch that a growing consumer lease-book does not come at the cost of leasing to poorer quality prospects.
Regulatory Issues
At its full-year results in May, Thorn told the market that it was working with the Australian Securities and Investment Commission (ASIC) over possible breaches to its responsible lending obligations between 2012 and 2015.
Thorn told the market again today that it expected to receive a financial penalty, but was unable to quantify the potential size of this and thus is unable to update the market on the potential impact. Thorn set aside $3.1 million to compensate the affected customers.
Based on ASIC's extensive history of slapping financial misdemeanours on the wrist, my guess is that the eventual impact on Thorn won't be big.
It's not a perfect comparison, but Cash Converters International Ltd (ASX: CCV) recently paid $12 million in fines for a similar charge of failing to make sure consumers' stated incomes were accurate.
Thorn also noted it has repaid some customers who had paid too much in advance of their contractual obligations. Asides from an $8 million reduction in liabilities and a $0.3 million interest expense, the impact does not appear to be material.
Now What?
Thorn is a small company with a fair chunk of debt and some regulatory clouds hanging over its head – so there's no surprise it's out of favour with the market. Yet its 6% dividend looks quite sustainable, and asides from the ASIC fine, most of the regulatory impacts are both quantifiable and within the group's ability to pay. It's not for everyone, but it does look like an opportunity today.
(For full disclosure, I was recently forced to sell my Thorn shares in order to raise funds for things outside my share portfolio).
