MENU

Is this your opportunity to buy Thorn Group?

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!

Looking for more sturdy businesses that pay you a solid dividend?

The Motley Fool teaches readers to invest in underlying businesses, rather than stock tickers. Readers can access our full analysis of 3 of our favourite long-term investments: dividend-paying companies with excellent underlying businesses. Check out our special FREE report "3 Stocks for the Great Dividend Boom" to discover the names of 3 of the best companies to buy now. Click here now to find out the names, stock symbols, and full research for three of our favourite income ideas, all completely free!

Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article

 

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.