Out-of-favour consumer leasing company Thorn Group Ltd (ASX: TGA) released its annual results to the market late yesterday afternoon. While reported profits were sharply up, revenue growth was modest and the dividend was cut. Here's what you need to know:
- Revenue rose 3% to $299 million
- Net profit after tax (NPAT) rose 25% to $25.3 million
- Dividends of 8 cents per share (11.5 cents last year)
- Tough conditions in consumer leasing
- Moderate increase in consumer 30+ day delinquencies
- Strong growth in business finance
- Closed some stores and reduced staff numbers, investing in new online application process
- Subdued outlook for 2018
So What?
A creditable result from Thorn, although the increase in net profit after tax is not as good as it appears at first glance, since last year's results were impacted by one-off losses regarding the sale of the NCML business.
Thorn's results this year were also impacted by one-off costs, including provisions made for an anticipated regulatory penalty. On an adjusted basis, Thorn's underlying profit was $31.4 million, up from an underlying result of $30.3 million in 2016.
While business finance is expected to continue strong growth next year, the outlook for the consumer leasing segment remains mediocre. Thorn recently lowered prices across its network in response to the Small Account Credit Contract (SACC) and consumer leasing laws, which will reduce earnings. It faces a class action and also has seen a rise in the number of customers behind in their repayments.
With the challenges ahead for Radio Rentals (consumer leasing), management elected to cut the dividend in order to conserve capital and free up some extra funds for the growth in business finance.
Now What?
Thorn looks cheap, priced at about 8x full year profits and paying a 6.4% fully franked dividend. It is cheap for a reason, with the above concerns as well as medium levels of debt and a high level of regulatory scrutiny obviously worrying shareholders. Thorn is also vulnerable to a slowdown in the wider economy, especially if unemployment rises. Even so, I feel that the risks are largely priced in, and I would consider buying shares in Thorn today.
