It’s not too late to jump onto the ThinkSmart (TSM) bandwagon, even though the stock has rallied around 50% since last December.
The consumer financing solutions company enjoyed a sharp bounce in its share price after it announced a sizable capital return from the divestment of its local operations on December 12.
The market has not quite worked out the implications from the divestment that will see ThinkSmart become a UK-focused organisation after it sells its Australian and New Zealand business to FlexiGroup (FXL) for $43 million.
The 14 cents uplift in the share to 42 cents following the news really reflects little more than the forecast capital return and special dividend of 11 cents a share and franking credit worth around 1.5 cents. The balance of the proceeds from the sale will be used to fund an on-market buyback of up to 10% of its shares and to fund the expansion of its UK operations.
But the company is worth more without its Australian and New Zealand businesses and it’s likely the market will catch on to that when management delivers its full-year earnings report on February 18 or 19.
Analysts and investors will be hanging on management’s every word given how long the stock has spent in the “sin bin”. ThinkSmart got smacked when it posted a shock net loss in 2012 (its financial year is the same as the calendar year) due to a change in the way it funded its business model.
ThinkSmart used to rely on banks to provide financing to consumers, but the global financial crisis saw banks beat a hasty retreat. The company was then forced to turn to the securitisation market for funds, which is exactly what market darling FlexiGroup does. The changeover resulted in a one-off large hit to ThinkSmart’s bottom-line, and management has been working hard to rebuild trust since.
ThinkSmart provides leasing or interest-free packages for shoppers at retail outlets such as JB Hi Fi and it has similar arrangements with a few leading retailers in the UK.
The fact is, the local business has been a drag on its bottom line. The Australian division posted a pre-tax loss of $4.3 million in 2012 compared with a pre-tax profit of $8.7 million the year before, while the UK division turned in a 26.1% uplift in pre-tax profit to $7.7 million last year.
The Australian and New Zealand divestment will see group revenue fall this year, as the local business will not be contributing to the top line. But overall profitability is expected to increase, not only because ThinkSmart will be free of the struggling division but because of the expected fall in corporate head-office costs from $5.1 million to around $3 million.
It would be disappointing if the UK operations did not post double-digit growth for the next few years given the UK is expected to lead the European economic recovery and the room for ThinkSmart to expand its business in that market. The company has signed on Europe’s largest electronics specialty chain Dixons and Europe’s biggest home improvement retailer Kingfisher, and is aiming on securing more partnership deals this year.
Further, ThinkSmart’s bottom-line is likely to benefit from the continued strengthening of the British pound against the Australian dollar.
Factoring in a relatively conservative 10% growth assumption for the UK for 2014, the stock would be trading on a forecast normalised price-earnings (P/E) multiple of under 10 times, and that is on an ex-distribution basis.
That is arguably too cheap as it would mean ThinkSmart continues to trade at a 40% discount to FlexiGroup. This discount might have been justified a year ago, but ThinkSmart has redeemed itself as it is firmly back on the growth path and should be trading on an average market multiple of about 15 times, at least.
This puts the fair value at 49.5 cents a share, or 60.5 cents on a cum-distribution basis. Eligible shareholders also will get a 1.5 cent franking credit on top of this, which implies a potential 46% total upside over the next 12 months if bought with the rights to the distribution.
Management has said it is looking to reinstate regular dividend payments, and I believe this will start in 2014 onwards with shareholders getting the capital return and special dividend from the divestment this year.
ThinkSmart needs the Australia Tax Office to give its tick of approval for the capital return to undertake the distribution. Going by precedence, there is no reason to think the ATO would find issue with the way the distribution is structured, and a decision is expected around April.
If the Tax Office objects to the capital return, there are other ways for ThinkSmart to return cash to shareholders.