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Knock out! Why the Thorn Group Ltd share price is being slammed

The Thorn Group Ltd (ASX: TGA) share price has fallen 8% following a concerning market update.

Thorn Group Share Price

Source: Google Finance

Source: Google Finance

In an announcement to the market this morning, the short-term finance provider said that it has downgraded its profit guidance for its 2017 financial year.

The company said it continues to work with the Australian Securities and Investments Commission (ASIC) regarding its investigation into the lending standards at Radio Rentals (owned by Thorn). So far, Thorn has made provisions in its accounts for potential compensation to customers who, “did not meet minimum income thresholds for their contracts.” In other words, for providing finance to people without the income to support the payments.

Despite its existing provisions, however, Thorn announced an additional provision of $4 million today. “Discussions with ASIC have now reached a point where Thorn Group anticipates that ASIC will seek a civil penalty and require further compensation and remediation,” the company’s ASX announcement read. “In light of this, the Board considers it prudent to make a further provision with a $4 million profit after tax impact in its financial statements for the year ending 31 March 2017.”

In response, the company’s outlook for profit growth has narrowed to between $24 million and $26 million for the full year.

The company is now restructuring the Radio Rentals business by closing underperforming stores and removing 53 staff. The company will also merge its Trade & Debtor Finance and Equipment Finance divisions.

Additionally, given the update and undertakings, Thorn has warned that it may be required to cut its final dividend from last’s six cents per share. It will give more details when it releases its full-year result on 26 May 2017.

Should you buy Thorn Group shares?

Allegations of selling finance to people who cannot afford it are far to common, in my opinion. The people who take these loans and financing are often those who are in a difficult financial position and can be vulnerable to mounting interest charges.

However, if you take away the companies that offer these services, chances are, people desperate for the short-term money will turn to dodgy finance companies, quasi-finance companies or people who are not in finance at all (read: loan sharks). 

For that reason, I find it difficult to imagine the services provided by companies like Thorn going out of business completely. Admittedly, these types of companies can be caught between a rock (the regulator) and a hard place (low-income customers), potentially making profits inconsistent.

However, if you are so inclined, running the ruler over Thorn might produce some surprising results because, at today’s prices, its valuation does not appear demanding.

Personally, I prefer a collection of solid mid-cap and blue chip DIVIDEND shares in my portfolio – not small caps like Thorn.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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