Thorn Group

Thorn Group owns consumer equipment hire company Radio Rentals, unsecured lender Cashfirst and commercial offerings in both equipment hire (Thorn Equipment Hire) and financial services (NCML). Its recent history has been good—it has generated high returns on capital employed and has grown earnings per share at more than 25% per year over the past three years. Dividends per share have almost doubled over that period, and the stock has dutifully followed suit. Yet it trades on a historic PER of just 10 and clearly has intriguing attributes for the value seeker. If the future looks like the past, shareholders should do well.

But we fear that Thorn Group is sitting on a business fault line. Colleague Steve Johnson had damning things to say about somewhat similar finance companies Flexigroup and Silver Chef; we concur and share similar concerns over Thorn Group.

Renting a product through Radio Rentals is extremely expensive. Take, for example, the first fridge/freezer we spotted on its website today—a Mitsubishi Electric 260 litre. You can rent in from Radio Rentals on an 18-month contract for $9.95 per week. That comes to more than $775 (assuming no additional fees) over the term, after which you’ll have no fridge. Alternatively, you can buy the same fridge free and clear for $599 at Bing Lee, without taking advantage of the latter’s ‘Everything’s Negotiable’ claim.

Those needing a bigger fridge might opt for the LG 422 litre offering, renting for 18 months for $1,166. But we’d prefer buying it outright at www.appliancesonline.com.au for $733 and using it for the next 10 years instead.

The loan offerings from Cashfirst are similarly appalling value. According to its website, one can borrow $5,000 for two years and repayments will amount to $311.39 per month. We make that an implied interest rate of more than 50% per annum. Default rates on such loans are likely to be high and so the loan rate must be high to compensate the lender for the risk—but 50%?

The pricing makes it obvious that both the Radio Rentals and Cashfirst businesses are reliant on the poor (those who can’t afford the upfront payment) and/or those less financially savvy (and unable to construct a discounted cash flow model). The chief concern isn’t that the products are rip-offs, it’s that clients can’t easily see just how much they’re being ripped off. In contrast to those advertising mobile phone contracts (where strict rules apply), nowhere obvious on the Radio Rentals website does it show the total cost of the contract (an amount which would make comparisons with outright buying extremely easy). And nowhere on the Cashfirst page is there mention of the 50% p.a. effective borrowing costs.

We think there’s every chance that ASIC could deliver more stringent disclosure rules for such offerings. And if they do, the jig is probably up. As with stocks like Cabcharge and McMillan Shakespeare, we’re extremely uncomfortable owning shares in any company that could have its business wiped out so easily. The Thorn Group share price isn’t low enough to compensate us for this earthquake risks. AVOID.