Cashflows don't lie18 July 2012
The importance of the cashflow statement cannot be overstated. While the income report is highly flexible, the cashflow statement is rigid. Cash comes in, cash goes out; here's the bank balance at the end. The cashflow statement is the most honest and trustworthy part of the financial report and an investor's best friend.
While Thorn Group (ASX:TGA), a rental/finance company in the consumer and small commercial space, has been on my watchlist for quite a while, their cashflow position has always been a factor in my indecision regarding the company. Especially being capital intensive in nature, adequate cash need to be generated to fund future growth. Otherwise such a company will continue to hit up the market with dilutive capital raisings.
The initial read of the annual report (year ending 31 March 2012) did little to change my mind. The company reported an after tax profit of $27.8m, operating cashflow of +$58.8m and financing cashflow of -$57.1m. With purchases of rental assets unchanged from the previous year and little impact from timing of tax payments, I was ready to classify the reported profit purely an "accounting" one and move on.
I did end up persisting by listening to their recorded presentation of the final result. And I listened, for the entire hour long presentation. And the following week I gave it a second listening during a long commute. Hands down it is one of the best public shareholder communications I've heard and management should be commended on their efforts in informing all shareholders of the business's health. That's one big tick, trustworthy management.
Around the 20 minute mark, some time was spent on clarifying the cashflow position. In summary the company had made investments during the year that may have adversely affected the cashflow statement - especially operating cashflow where these investments mainly impact:
- Cashfirst (personal loans) loan book increased by +$5.3m ($12m to $17.3m)
- Thorn Equipment Finance (SME equipment financing) receivables grew by +$12m ($1m to $13m)
- An additional $6.8m PDL assets were purchased, $2.4m were amortised so the net result was +$4.4m in PDL assets
- Management also stated there were some timing changes that impacted cashflow
- $1m flatpanel pre-payments
- $1m in bonuses timing
- $1m in paying creditors earlier
With these adjustments, free cashflow comes in around $26.5m which is very close to the $27.8m reported profit. Tick number 2, cashflow passes the test.
And it's got other things going for it too: trailing P/E under 8, fully franked dividend over 6%, ROE 23%, 10% debt/equity. While rental growth is flattening, they're still holding their ground and new businesses in personal loans, equipment finance and perhaps car financing are likely to drive future growth. A few more ticks there.
For further reading I recommend Michael Horn's Magnus Opus on the company - an awesome and extremely comprehensive report.
TGA last traded at: $1.53.
Disclosure: At the time of publishing, I own shares in TGA.
I'm not a licensed financial adviser and nothing on this site constitutes financial advice.