TFG – Downside risks Down Under

TFG’s 1H24 results reflected strong topline growth, aided by acquisitions and the weaker rand, but the 200bps drop in GPM weighed on the performance, resulting in a 15.2% drop in HEPS.

In TFG Africa, the clothing category performed well, but this may have been driven by increased promotional activity and stock clearance, which negatively impacted gross margins. While management is excited about the prospects for the online Bash business, we are concerned that the targeted 20% online sales contribution could dilute its margins.

The profitability of the credit business improved considerably, but we find the lower impairment provision surprising given the deterioration in the buying position of credit customers and the higher overdue value-to-book ratios.

Even though TFG London’s turnover dropped by 10.5% y-y in 1H24, its sales per store (adjusted for online sales) have improved substantially in recent years and now average GBP166 000 (compared to GBP142 000 in 1H20). The strategy to shift away from concessions to more owned stores resulted in higher trading densities, higher GPMs and more stable EBIT margins, in our view.

Over the past few years, TFG Australia’s strong performance has provided an underpin for the group and we are concerned that a deterioration in this division’s performance could weigh on TFG. We think the decline in turnover is not only due to a high base, as rapidly rising interest rates and the structure of mortgage lending in the country pose a significant risk to discretionary consumer spending. We show that as fixed-rate mortgages are reset, homeowners could face a 42% increase in monthly bond repayments, which will put pressure on household spending in the near term.