Thorn lowers profit guidance

Thorn Group has provided a trading update noting that net profit will be towards the lower end of its $17m–20m guidance. Management noted that Radio Rentals' performance ‘continues to deteriorate', and that next year's profits will be significantly lower due to subdued origination of new leases. Managment also said that the business finance division continues to perform well.

The announcement has knocked 16% off Thorn's share price, but we struggle to see how this can put a similar dent in its value. Let's extrapolate things to reiterate our argument.

Thorn's share price is down because originations are weak. But if originations fell 100% (ie if Thorn was placed into run-off), Thorn's leases would convert to cash over a few years, and that cash pile would be worth roughly twice the current price. But with originations continuing, and Thorn remaining profitable, albeit at a lower rate, it means the potential cash pile continues to increase (assuming credit quality remains as is, of course).

This means that Thorn's value should slightly exceed its net tangible assets, ascribing some value to its origination capacity. The market disagrees on the basis that Thorn's value is dependent on near-term profits.

Just when we thought things were improving we've experienced another tremor. But despite a shake, the foundation remains intact. Thorn's rewards still justify its risks. SPECULATIVE BUY