No Thorn in my side

Thorn Group is a well-managed company available at a good discount. It deserves a place on our radar. At the very least Thorn should be compared to your existing holding. Now is a good time to trade up to better quality companies.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Each week The Motley Fool highlights a company on its radar. This week we look at Thorn.

Thorn Group Limited (ASX:TGA) is best known for its national store networks, Radio Rentals and Rentlo. Thorns core business is the rental and sale of household goods. It also provides unsecured cash loans to struggling Australians.

Thorn has embraced online retailing through [Update: Thorn has exited its online venture]. It also has fingers in a couple other pies as it strives to be Australia's leading provider of financial services to niche retail and commercial markets.

A key show stopper when looking at financial service firms is elevated debt levels. Thorn effortlessly clears that first hurdle.

Thanks to investors who paid $1.85 per share during June's renounceable rights offering, Thorn has a strong balance sheet. We applaud Thorn for being one of the all too few companies to make its rights renounceable. That is the fairest way to raise new capital from shareholders.

A recipe for business success

Start with a solid business with a long history. Radio Rentals was 70 years old when it listed on the ASX in 2006. Since listing it has grown equity at 15% per year.

Increase revenue

Revenues have grown solidly over the last five years, at over 12% per year. Better yet, the majority of revenues are of the highly desirable recurring nature. With rentals contracts averaging two years, management has excellent visibility of forward revenue.

Increase margins

The following chart shows how an 8.6% increase in revenue in 2011 resulted in a 31% increase in Thorn's EBITDA – earnings before interest, taxes, depreciation and amortisation. Operating leverage results in more of each extra dollar of revenue flowing through to earnings.

Thorn Group Limited. (ASX:TGA) Increases margins

A dash of acquisition

Thorn bought National Credit Management Limited in March for a reasonable price. The price tag of $32.5 million, represented a fair multiple of 5.2x EBIT – earnings before tax and interest. NCML is a leading provider of integrated receivables management services in Australia.

A recipe for investing success

Add a pinch of recognition and a wide margin of safety to business success.

Thorn was added to the S&P/ASX300 index in September and has been on the radar of value investors for a few years.

Thorn has one of the highest margins of safety on my watchlist. I value Thorn at around 40% higher than its current $1.60 price tag. It's attractive without being a table pounding buy.

In the rear-view mirror

As this three year chart shows Thorn was well rewarded by investors for its consistent earnings growth. Or at least it was until April this year. Thorn is down 30% since then as investors have turned fearful.

Source: S&P Capital IQ

Management recently announced good performance and growth in Thorn's core business. That growth, along with NCML's accretive earnings, may see Thorn increase earnings per share this half, despite the 12.5% dilution from the rights offer.

Foolish bottom line

Thorn is a well-managed company available at a good discount. It deserves a place on our radar. At the very least Thorn should be compared to your existing holding. Now is a good time to trade up to better quality companies.

The best opportunity to load up on Thorn could come courtesy of Europe. Whether or not Thorn is still a growth baby at 74 years old won't matter if GFC2 hits — the sovereign crisis. As a finance company, Thorn will be thrown out with the bathwater. That's the kind of circumstances that yields potential multi-baggers.

This article contains general investment advice only (under AFSL 400691).

Dean Morel is The Motley Fool's Investment Analyst. Dean has no position in Thorn Group. The Motley Fool's purpose is to educate, amuse and enrich investors. Readers can click here for a free Motley Fool report titled Read This Before The Next Market Crash

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »