Consumer goods leasing company Thorn Group Ltd (ASX: TGA) crashed over 6% in early trade as it faces accusations that it is aggressively targeting Centrelink customers.
The Australian Broadcasting Corporation reported that Radio Rentals, a business owned by Thorn Group, received $90 million in the last financial year from the federal Department of Human Services through the direct debit Centrepay system.
The stock has dropped to a near five-month low of $2.55 at the time of writing.
This issue is more than a thorn in the side of shareholders as the amount is very material to the group given that it posted total revenue of $235 million in 2013-14.
However, if you looked at its accounts more closely, revenue generated from its "consumer leasing" business was around $90 million, suggesting that just about all of the cash made from leasing white-and brown-goods came from the Centrepay system.
Thorn Group's other businesses include commercial equipment and vehicle leasing as well as providing unsecured loans.
Businesses that target consumers from lower socio-economic backgrounds aren't necessarily bad. If anything, they often fulfill a real need.
But this report will trigger a number of uncomfortable questions for Thorn Group, especially since its Radio Rentals business has delivered record earnings in 2013-14 and at the latest half year result.
The fear is Thorn Group could face similar public scrutiny as payday lenders Cash Converters International Ltd (ASX: CCV) and Money3 Corporation Limited (ASX: MNY).
The scrutiny forced the federal government to impose regulations on the payday lending industry. My colleague Owen Raskiewicz has written about these stocks recently.
Thorn Group has been one of the few shining stars in the retail sector with the stock gaining 31% over the past 12 months, before today's news because its business model is relatively resilient to economic swings.
But if it is proven that Radio Rentals used "predatory behaviour" in winning new business, the stock has a long way to fall.
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