Sell #2: Sold Thorn Group Ltd

Sell #2: Sold Thorn Group Ltd

I’ve sold my stake in Thorn Group Ltd (ASX: TGA). Upon careful reflection, which I hinted at recently , I’ve lost confidence in my investment in the company. It’s not so much that things have changed, more that I think I was framing the investment the wrong way when I bought. I have also tied together a few pieces of scuttlebutt that are painting a grimmer picture than the one I had in mind at the time of purchase.

To be clear, the scuttlebutt alone is not what’s driving the decision, but when you tie all of the below factors together, it was probably time for me to sell.

Why I sold:

First, I think my return hurdle was too low. I was targeting about 10% per annum in returns from dividends and a normalisation of the P/E ratio to a ‘fair’ value of 12x or so. I’m not sure Thorn is the right company to own to be content with those type of returns, given the risks. I might as well own some large blue chip.

Second, I am in general extremely bearish on the Australian consumer credit market (and was before I bought Thorn). So Thorn may also not have been ‘ideologically’ suited to my investing style, for want of a better word.

Third, I noted here  that competition is intensifying, which could be problematic. The original thesis assumed that some players would have to drop out of the market due to new regulation. That may still happen but compliant competitors are also expanding.

Fourth, in the latest report originations were about average, which is all the thesis required, but there was a huge increase in equipment leasing to franchisees. Elsewhere we’ve seen significant pressure on franchisees and the franchise business model (7-11, Domino’s Pizza, etc). I generally believe that running a franchise is a marginal business. Australia also seems to have undergone something of a franchise boom recently, with every man and his dog business converting to the franchise model. Lemme tell ya, this is not because of an overwhelming interest in providing outstanding economic opportunity to small independent business operators.

Put together increasing competition, a big uptick in leasing to what I perceive is a high risk and stressed demographic (franchisees), the modest returns on offer, and my general dislike for consumer credit businesses at the moment, and I’m no longer that keen on Thorn. A converse view would be that, since Australia is in a franchise boom, Thorn is a natural beneficiary (and is already benefiting) from equipment leasing etc. But speaking for myself I think many franchise business models (at least in Quick-Service Restaurant sector) are swimming naked.

Anyway, I was sitting down the other day and I asked myself “Should I sell Thorn?” and I replied “I’m not sure, but whatever you do, definitely don’t buy any more” and that was when I knew it was time to go.

Was Thorn a mistake? 

Unlike RNY Property Trust, where I believe I generally followed a good process, the Thorn investment could reflect poor process. I believe if you lose faith in an investment without major changes in the company’s operations in the first few months (leasing to franchises notwithstanding), then you had a shaky framework for the investment from the start.

From an abstract perspective, I’m looking at either a) poor justification for the purchase or b) lack of conviction to follow through my ideas, and I’m not entirely sure which yet.

It is frustrating to sell shares for a loss before you even give the thesis a chance to play out, but in this situation I felt I was better off pulling my finger out of this particular pie and looking for a better opportunity. This loss combined with the RNY loss means that I will almost certainly underperform in the current quarter and perhaps even the current year. However, there are a few opportunities floating around that I am investigating which will hopefully more than compensate over the next 4.5 years.

On 15/08/2017 I sold my 400 Thorn shares for $481.69, compared to the original purchase price of $526.95. This works out to a loss of $45.26, or around 8.6%. After accounting for $10 in dividends (2.5c per share) the loss is $35.26, or 6.7%.

I don’t have any financial interest in any public or private company mentioned. I formerly owned RNY and Thorn Group but have sold all of my shares. This is a disclosure and not a recommendation.

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