Thursday, 6 March 2014

Cashing in on ThinkSmart (ASX:TSM)

I recently purchased ThinkSmart (ASX:TSM) at $0.40 after the company announced the sale of their Australian operation to FlexiGroup for $43 million.

TSM is a point of sale leasing company with operations in Australia and the UK. Rather than purchase an item at a retailer, the TSM business model essentially allows the customer to rent a product with a regular nominal fee over a contract period. After the contract period, the customer can decide if they want to upgrade, return the product or purchase it at fair market price. TSM therefore stumps up the initial cost of the product through its financing arrangements and receives a recurring rental stream in return.

The Australian operation includes the RentSmart and Fido brands and has been making a loss. You can see this in the below table when looking at the 1H2013 and 1H2012 results. To a degree, the losses have been obscured by a change in the way TSM accounted for revenues on rental contracts in Australia. From 2012 a lease accounting methodology has been used which has resulted in revenues being recognised over the life of a contract (as opposed to upfront). You can see this in the change in Net Operating Income between 2012 and 2011, making it more difficult to see the underlying results.

On the other hand, the UK operation is profitable and growing. The UK operation recorded a segment profit before tax of $4m for 1H 2013 and $7.8m for the 2013 full year results. The full year profit results were consistent with the prior year, however growth in new volumes were slightly down on the year prior. Management put this down to a spike in new business which occurred pre-Olympics. TSM  provide financing arrangement by partnering with the likes of Currys PC World (Sales of over £8 Billion), Kingfisher Future Homes, WEX photographic and Warings Furniture.

Sale of loss-making Australian Operation provides catalyst for purchase

At $0.40 per share and 162m shares outstanding, TSM's market capitalisation is approximately $65m. Post the sale of the Australian operation to FlexiGroup, management anticipate net assets of approximately $63m of which approximately $48m is in cash.

The cash alone equates to a share price of approximately 29.5 cents per share. TSM have since used approximately $5.8m of this cash in paying a dividend of 3.6 cents per share. Analysing the company on an ex-div basis, TSM have $42.2m in cash, implying a cash value per share of 26 cents per share. Management also intend on giving 7.4 cents per share back as a capital return and have commenced a share buy-back of up to 10% of the company's issued capital.

Taking the cash value per share of 26 cents off the share price implies the market is valuing the UK business at $0.14 per share. This seems conservative based on management's guidance of $3m NPAT for 2014 or approximately 2 cents per share (a PER of 7x). I think a multiple of 12.5 - 15 is more appropriate for TSM based on a standalone UK operation, valuing the business between 23 and 28 cents per share. This multiple would also be consistent with peers such as FlexiGroup.

I don't particularly like the business model of rental companies as from a customer point of view, the rented items have exorbitant implicit interest rates. However I think the price is attractive enough to establish a position. With net assets of $63m the downside is protected (equivalent to a price to book ratio of 1.03). These assets are also substantially cash instead of intangibles. There is also upside potential from the business being re-rated to a more appropriate multiple and from continued growth. 

Note: The information contained in this post is for my own purposes only.  The post should not be confused with an investment recommendation and details should not be relied upon.

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