Shares in Thorn Group (ASX: TGA), the company that owns Radio Rentals, have dropped almost 10% since the company announced profit of $13.3 million for the six months to September 2013. The profit result was down about 5% on the prior corresponding period. Profits were impacted by the setup costs associated with new stores and the new rent-drive-buy program.
Radio Rentals rents consumer goods to customers, usually for a period of three years, after which the customer can buy the item for $1. The exception is for electronics such as smart phones, which the customer owns immediately, but pays off over time. In recent years, Radio Rentals has begun to rent furniture too, and this is now an important part of the company's offering.
Investors could be forgiven for thinking that Thorn Group is simply a retailer competing with the likes of JB Hi-Fi (ASX: JBH) and Nick Scali (ASX: NCK). However, this is far from the truth. One difference is that most of Thorn Group's customers are in a low-income bracket, and they do not pay upfront. The majority of customers receive government benefits, and in many cases Thorn Group receives its money directly from the government.
This means that Thorn Group simply isn't competing with the most successful retailers. Rather, it occupies a niche. The company's core competency is managing debtors, and it does a very good job of this. One positive aspect of the latest results was that "lease receivables" – the money owed to Thorn by its customers – grew by 11% to over $100 million.
In fact, Thorn probably has more in common with Cash Converters (ASX: CCV) than a traditional retailer. Not only does Thorn Group rent its goods, but it also has an increasingly important consumer finance business that operates under the Cashfirst and Thorn Money brands. Unlike Cash Converters, which is the subject of a class action lawsuit, Thorn Group has steered clear of questionable payday lending (so far).
Thorn Group also has a division called Thorn Equipment Finance, which provides equipment to small business. This division is similar to Silverchef (ASX: SIV). That company's share price is up over 55% in the last 12 months! Thorn Equipment Finance has grown its book by over $15 million in the last year, but EBITDA for the half was only $1.5 million.
The final business owned by the Thorn Group is NCML, which is essentially a debt collector, somewhat similar to Collection House (ASX: CLH). EBITDA for this business was $2 million, and the company claims the business is well positioned for growth. It suffered a setback last year when it lost the ATO as a client.
Foolish takeaway
The Radio Rentals business is by far the most important part of Thorn Group. One concern I have is that the CEO, John Hughes, has said that the company is considering "refreshing" the brand because of negative connotations around the word "rental." Mr Hughes said, "We want to tap into the next level up of middle Australia, where a lot of people are currently rental averse." I'm not sure if the expense of rebranding is worth it. Radio Rentals is one of Australia's oldest brands!
Nevertheless, Thorn Group shareholders should not sell at these prices, in my opinion. After all, the company is paying shareholders a 4.7% dividend plus franking credits; that's better than a bank account!
