MARKETS SPECTATOR: Thorny credit crunch

John Hughes says Thorn Group is now targeting the middle class as the credit appetite of lower income consumers wanes.

John Hughes, the chief executive of lender, loaner and leaser Thorn Group, is 61 years of age. He says he has never seen economic conditions in Australia this bad for many consumers because of rising living expenses for such things such as power, and petrol.

“So many people have been hit hard by cost of living increases,” Hughes says, explaining that those earning less than $50,000 a year are not demanding the products and credit Thorn offers because they are keeping an eagle eye on their expenditure.

So Hughes now plans to try and tap into a new market: the increasingly squeezed middle class. Thorn will target those who earn about $80,000 a year but may have a spotty credit history and find it difficult to get a loan, for example, to buy a car. Thorn may give a prospective customer 12 months to prove they can meet rent payments before offering them a loan to purchase the vehicle. Hughes would not say what interest rate it would charge such customers. Thorn charges 38 per cent interest a year on unsecured loans of up to $5,000.

Hughes told Markets Spectator Thorn plans to introduce new consumer lease products, take home layby, start a savings club for customers and extend the life of its contracts to 48 months from 36 months all in an effort to bolster earnings. Thorn’s net profit in the 12 months to March 31 rose just 0.6 per cent to $28.02 million. Revenue was up 7.9 per cent to $203.2 million.

What would help Thorn and Australian business in general is a government with a firm majority, says Hughes. The lack of business confidence is astonishing, he says, and thus made consumers nervous as “they can smell what’s going on around them”. Consumers are saving up to 10 per cent of their disposable income according to Hughes. That’s not good for business from Thorn’s point of view.

At 1336 AEST Thorn shares were up 10 cents, or 4.7 per cent, to $2.23. The stock is up 51 per cent over the last 12 months. It is trading at 11.63 PE ratio compared to the 21.21 PE for the S&P/ASX 200 Index, according to Bloomberg.