Radio Rentals and Centrepay operator Thorn Group Ltd (ASX: TGA) reported its half-yearly results for the six months to 30 September 2015 to the market this morning. While a reasonable report, investors will note the slowing of profit growth that may concern some shareholders.
Here's what you need to know:
- Revenue rose 7.4% to $160.9 million
- Net Profit After Tax (NPAT) rose 1.5% to $15.4 million
- Interim dividend of 5.5 cents, to be paid on 21 January 2016
- Profit growth came mostly from Commercial Finance segment which showed significant growth (partly thanks to CRA, below) and nearly tripled its NPAT contribution
- Strong contribution from Cash Resources Australia ('CRA'), which was acquired in December 2014
- Credit risk remains the major risk to Thorn's business; bad debts and 30-day 'delinquency' (failure to pay) fell moderately compared to prior periods
- 'Thorn anticipates that its business segments will continue to trade positively…and that some costs will continue to be incurred in responding to and addressing regulatory issues in the short term'
So What?
Despite a strong performance from the Commercial Finance segment, the rest of Thorn's business performance was lacklustre. Consumer Leasing segment profits (before interest, tax and amortisation) shrank by 4% to $25 million, Receivables Management profits fell 20% to $1.4 million, and Consumer Finance profits fell 10% to $0.43 million.
Thorn management also addressed market concerns about the likelihood of increased government regulation by noting that it expected to continue incurring some costs in addressing regulatory issues.
Importantly for income investors, Thorn's whopping 6% dividend also remains intact, as the $6.6 million paid to investors in the recent half year represents roughly 10% of the $66 million Thorn generated in cash flow from its operations.
I do not believe Thorn will increase its dividend payout ratio in future periods as it must retain a significant amount of cash to repay loans and acquire rental assets for future contracts.
Now What?
Investors should keep an eye on bad debts and delinquency in future reporting periods. Thorn noted once again that the biggest risk to its business is credit risk, and with the Australian economy struggling to get out of second gear, higher unemployment could lead to sharp rises in delinquency and bad debts.
Average impairment losses (as a percentage of average net receivables) are currently 9.6% for Consumer Leasing, 0.9% for Commercial Finance – Equipment, 2.2% for Commercial Finance – Debtor, and 8% for Consumer Finance.
However, Thorn's dividend does appear highly secure both at the present and into the foreseeable future. With dividends making up such a small part of cash outflows I additionally believe them to be less at risk of being reduced compared to some other companies if general economic conditions worsen.
Combined with a modest price and continued steady business improvements, I consider Thorn to be a solid buy after today's results.
