Thorn Group Ltd

TGA Details

Strong growth expected in Business Finance while overall FY18 outlook is subdued:Thorn Group Ltd (ASX: TGA) has reported improvement in revenue, earnings and net profit for FY17. The group has signaled that its Business Finance segment is expected to enjoy robust growth; however, Consumer Leasing is facing a period of transition with some short-term challenges from adverse publicity, weaker retail market conditions, the deferral of returning customers due to the launch of the 4-year contract and significant business changes that are expected to impact the FY18 financials.For FY17 (ended March 31, 2017), revenue grew by 3% year on year (yoy) to $299m, while EBIT and NPAT reported 25% and 26% yoy growth at $47.1m and $25.3m, respectively. Notably during FY17, Radio Rentals segment witnessed a combination of business and regulatory issues, and posted a marginal 2.0% yoy growth in revenue and 17% yoy decline in EBIT, while Business Finance segment posted a revenue and EBIT growth of 23% yoy and 40% yoy, respectively. Further, the results were impacted by several significant items in 2017, as Radio Rentals made a further provision for the anticipated remediation costs and penalties from the ASIC regulatory review of $6.1m after tax leading to an adjusted NPAT of $31.4m.During FY17, the company sold its NCML receivables management business and is in the process of running off its TFS Consumer loan book. Although the overall revenue is steady for Radio Rentals, higher marketing and selling costs, lower prices (under proposed caps) and the regulatory provision impacted profits.
 

FY17 Financial summary (Source: Company reports)
 
Business finance on strong footing while Consumer Leasing has issues:Within the Thorn Business Finance division, the Equipment Finance business grew its revenue and EBIT strongly (up 58% to $26.4m and 83% to $16.1m, respectively) with the support of brokers and partners and the success of franchise financing. The Trade & Debtor Finance business absorbed costs from writing off bad debts as part of repositioning its portfolio towards a better business quality, which resulted in a downturn in EBIT from $4.3m to $2.3m in FY17. During FY17, the company has implemented several measures in Radio Rentals division to address business issues, improve its customer offer, and seek efficiencies. While some of these measures delivered benefits to customers and contributed to revenue growth, other investments to build a more stable business over the medium term resulted in higher costs in FY17. Those costs plus the provisioning for regulatory matters led to a 17% fall in EBIT to $36.3 million.
 
Recommendation: Considering the challenging business conditions for Radio Rentals including higher expenses from regulatory, legal issues and capital requirement for the ongoing growth in business finance, the company has rebased its dividend payment policy. It has declared a final fully franked dividend of 2.5 cents that brought the full year dividends to 8.0 cents at a 50% payout ratio against 11.5 cents in FY16 at 88% payout ratio. The stock has declined 33.4% over the past six months, while it was down over 6% on May 26, 2017 owing to a subdued outlook. We give a “Hold” recommendation on the stock at the current price of $ 1.17
 

TGA Daily Chart (Source: Thomson Reuters) 

RCG Corporation Ltd

RCG Details

Market conditions continue to be challenging:RCG Corporation Ltd.’s (ASX: RCG) sales performance across all business units for March and April has been low as the sales in both the Accent Retail and Hype business were just in line with the prior year, but not up to management’s expectations. The Athlete’s Foot’s (TAF) sales for the year-to-date continued to be in line with the prior year. However, the wholesale divisions of both the RCG and Accent business have performed poorly owing to exposure to the challenging conditions, since mid-February. RCG’s vertical retail business has also declined 5% on a like for like basis for the same period. Although, the management expects trading conditions to improve going forward, the subdued performance in the March / April period, together with a more cautious outlook for the remainder of the financial year led RCG to revise its EBITDA guidance to $74 million - $80 million for FY17 from the earlier guidance of $85 million - $88 million.

Recommendation: The stock has tumbled 56.3% over the past six months (May 26, 2017) and currently trading at low levels. Given the market scenario and continuous revision to earnings, we give a “Hold” recommendation on the stock at the current price of $ 0.60
 

RCG Daily Chart (Source: Thomson Reuters)

Vita Group Ltd

VTG Details

Uncertainty over ongoing discussion about remuneration reductions:Vita Group Ltd (ASX: VTG) witnessed a stock price surge of 7.8% on May 29, 2017, while its director Paul Wilson has acquired about 100,282 securities through on-market purchase. Vita Group has lately been hammered at the back of ongoing discussions with Telstra (ASX: TLS) over commercial terms as the remuneration reductions agreed to between December 2016 and February 2017 seem to be impacting operating margins negatively. Further, Telstra has informed about its intent to make further changes from 1 July 2017 to its remuneration policy by reducing 10%. A further reduction is expected to be done at the start of each of the FY19 and FY20. It also suggested that the impact of remuneration reductions could be partially mitigated through higher volume, improved mix, increased up-sell and cross-sell opportunities across categories, and from new products. In addition, TLS emphasized that its store footprint remains critical to its success and the group will work with its licensee network. As Vita Group is Telstra’s only Master Licensee, the group expects to retain a sizeable portion of the network despite the short-term challenges. VTG also expects to report a record FY17 EBITDA of $63m-$66m (against underlying EBITDA of $62m in FY16). However, the group has suspended any plans to expand number of stores in its network till the discussions with TLS are concluded.
 
Recommendation:Considering the impact of remuneration reductions and prevailing uncertainty about the ongoing discussions, we maintain a “Hold” on the stock at the current price of $ 1.10
 

VTG Daily Chart (Source: Thomson Reuters)

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