You will probably think I am crazy but I seriously love a good asset write down.
Why? Basically because it is an accounting entry and it is generally associated with an asset of a business which is not performing well. I know what you are thinking, he's finally cracked. That well may be true but please hear me out.
Most businesses do not sell just one line of goods or services. They produce a variety to broaden their market share and to diversify their risk. The problem with this strategy is that inevitably some lines are more profitable and these profits are often used to subsidise goods or services which are not doing as well.
Therefore when an asset write down is announced, it can mean that the poorly-performing product is being discontinued and the resources then channeled into the more profitable product. So while it sounds bad and the market will punish the share price when it is announced, in the long term it can actually be better for the company.
You will find this happens a lot when a new CEO joins a company as he or she is not emotionally attached to the current company offerings.
Great I can hear you say, just buy companies that write assets down. Well not exactly. If the write downs are for the main product or service the company sells, then the company could be in serious trouble. For me this company then becomes a turnaround proposition. By this I mean the company will need to reinvent what it does to survive. When survival is on the line my money looks elsewhere and you should too.
Below are two companies where the asset write downs will mean a stronger company in the future if I am correct in my belief.
FlexiGroup Limited (ASX: FXL)
Of the two companies I will discuss, FlexiGroup is my favourite. It has recently acquired Fisher and Paykel Finance and has taken the decision to wind down parts of its business with low or declining returns on equity. The company will no doubt find savings as synergies arise from its new acquisition. It trades on a price earnings of around 7 and a grossed up dividend of over 12%, which I believe can be maintained.
Thorn Group Ltd (ASX: TGA)
This one is a little bit more complicated. But like FlexiGroup, Thorn has decided to wind down under-performing parts of its business. Thorn Group has also fallen foul of government changes relating to small personal loans. Both events have seen the share price suffer accordingly. While its recent report was less than impressive it is important to note that revenue and underlying EBITA actually grew. One bright spot of the report was strong growth in business finance, which should see it give support to future dividends. Thorn Group trades on PE of 10 with a grossed up dividend of 11.5%.
