Thorn Group: Result 2019

Thorn Group is in distress and may soon cease to exist in its current form. The company's two main businesses - loans and leases to non-prime retail borrowers for consumer items, and to small businesses for business equipment - are weakening with little prospect of a turnaround. Thorn's shareholders and bankers are pushing for change.

Indeed, we've argued that Thorn is worth more dead than alive - and its latest result does nothing to dispel that view.

Retail struggles

The performance of the Consumer Leasing division is most telling. Despite store upgrades, heavy promotions and product changes, revenue fell 9% to $179m for the year to 31 March.

More importantly, Thorn's current customers are struggling. Nearly 15% of receivables are now more than 30 days behind on repayments from 11% last year, and 18% of the division's total amount due has been written off.

The combination of weaker repayments and low volumes mean the loan book has declined 11% to $156m. Operating profit slumped to a loss of $2m from a $28m profit last year. On top of that, the company wrote down $10m worth of intangible assets - mostly capitalised software expenses.

The division may return to profit next year - there are no intangibles left to write off - though the weak repayment performance is likely to persist.

Business troubles

The news from Business Finance was slightly better - although that's a low bar. Thorn has less expertise with equipment lending and we've been concerned that problem loans may mount.

A $10m provision for a loan provided through an agent is such a case. That pushed operating profit down around a third to $16m. A weakening economy may see increased losses in the rest of the portfolio next year.

That said, Thorn's exposure to this division is only $24m, represented by its notes in a trust that houses the Business Finance assets, although it does also earn a range of fees.

Push for change

Beyond the two divisions, Thorn is struggling with a bloated cost base that chews up around $14m a year.

The company's decline also means that its bankers must approve any increase in lending. No lender can thrive with such constraints.

For shareholders, however, this may prove a blessing. There is around $1 per share in net assets mostly in receivables that convert to cash in a few years.

Last Thursday, the company responded to press speculation by confirming it had received offers for some or all of the business. Interestingly, it added that 'no decisions have been made by Thorn as to the course of action that will maximise value for shareholders'. The first part of that is the usual boiler plate you'd expect in these situations, but the second part suggests that maybe management has become more committed to realising some of the value locked up in the company.

A few hurdles

There are impediments to any sale, however. Thorn is facing a class action lawsuit, and uncertainty of the outcome could dissuade some buyers.

At the same time, the declining net assets of the company would mean offers well below that amount.

There is a risk too that sale offers are rejected in favour of turning the company around. We consider this to be unlikely, in large part to the institutional shareholders agitating the board for change.

In any case, we'll wait for further news of the strategic review and recommend members HOLD.

Disclosure: The author owns shares in Thorn Group.