Undervalued stock of the week - Thorn Group

April 9, 2013, 3:32 pm John Abernethy Yahoo!7

The value investor identified Thorn Group as an undervalued share last year and upon reinvestigation the stock remains a worthwhile consideration.

Thorn Group has performed very well since we noted the stock was compelling value in August last year when its share price was just $1.56.

Today, it is trading at a discount of only around 5 per cent to MyClime’s 2013 valuation but its outlook has changed substantially due to a change in its business direction.

As such, while our 2013 price target remains $2.16, there appears to be considerable room for growth in the longer term if its new strategies bear fruit as hoped.

Thorn traditionally provides retail and financial services to borrowers with damaged credit records. It rents televisions, DVDs, white goods and other home appliances through its Radio Rentals and Rentlo brands, and also provides loans for customers to buy the goods outright.

This has proven to be a successful model but while the sharp rise in price over recent months was largely due to undervaluation by the market, future valuation and therefore share price growth is going to be driven by business growth. And for that reason it is worth running over its new strategy.

While Radio Rentals has been the major driver for 90 per cent of its growth, it appears unlikely that this Division can continue driving the company forward at the rate the market desires.

Therefore the management are busy investing in subsidiaries Cash First, Thorn Equipment Finance and NCML to drive longer-term growth. It is through these subsidiaries we believe strong returns will come.

Cash First provides unsecured consumer loans of an average of $2,400 but we see plenty of scope for the company to increase the size of loans and customer base as GE Money, a big player in this area, retreats from the market.

But the biggest opportunities come from Thorn Equipment Finance and Rent Drive Buy, a car finance scheme.

The Australian equipment finance industry is huge, worth over $80billion in 2012, giving plenty of room for Thorn to become a big player.

Already they have taken a wisely diversified approach, with operations financing kitchens, gaming equipment, telephony, IT equipment, printers and copiers and point of sale equipment for retailers.

The current Thorn Equipment Finance loan book stood at just $35million in January but rival company Flexigroup was able to build a loan book of a similar business from $27million in 2010 to $180million in 2012.

Thorn’s experience in dealing with sub-prime type borrowers is also key; rivals such as Flexigroup and GE Money reject about 40 per cent of applications for product finance inside partner retailers such as Harvey Norman because they provide finance for new products and lack access to a secondary market.

Thorn, on the other hand, can lend to these borrowers because if they default and the goods need to be repossessed, they can then re-rent them through Radio Rentals. This is a key differentiator that we think gives them a real edge.

We are happy holders of the stock at this price and for patient investors it may be worthwhile considering it for accumulation on any price weakness towards $1.90. At that price there is a suitable margin of safety for long term investors.

Thorn Group
Current price $2.04 (April 8th 2013)
Forecast value $2.16++

Potential upside: 5.88%

Readers of Yahoo!7 Finance can obtain a free 14-day trial offer of the MyClime online share valuation and research service at www.clime.com.au/

+ Investors should not rely on this information alone and should seek independent financial advice from a qualified expert before considering any share market investment.
++ Fair or forecast value is the price placed on the share after calculating a range of factors including profitability, assets, debt and, most importantly, Return on Equity – the same measure used by Warren Buffett to assess long-term value.
Shares are assessed by Clime Asset Management to calculate which companies are undervalued or over-valued based on their return on equity. History has shown that the most successful companies are those that produce the highest returns per dollar of shareholders' equity, yet this is not typically how shares are valued. This system highlights shares that are undervalued on this key measure. Shares are expected to reach this value in 3-5 years, as price tends to follow value in time.
Information is intended as a guide only. For specific advice contact your financial services professional.

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