Letter to Shareholders

22 Jan Letter to Shareholders

Outlook for ThinkSmart Given the recent share price decline for ThinkSmart (ASX:TSM), the Board feels compelled to draw Shareholders’ attention to the positive outlook for the Company, which we believe is not reflected in the Company’s current market valuation. 

On December 19th, 2008, with 12 days remaining of its full financial trading year, ThinkSmart released a profit guidance that it would achieve an EBITDA of $11m for FY 2008, before allowing for operating costs of A$2.7m and exit costs of A$790k associated with its U.S. operations. 

This represents a 32% like-for-like increase in EBITDA on FY07 and a CAGR on ThinkSmart’s underlying EBITDA of over 150% since listing on the ASX. ThinkSmart’s decision to postpone further new business from its U.S. operations was taken in light of uncertainty about the length and depth of the U.S. downturn, restrictive credit conditions in the US and the continuing volatility of currency exchange rates.  This decision was taken in line with ThinkSmart’s aim to continue to grow its business through cash flow, not debt.

No U.S. operating costs will be incurred in 2009, yet our relationships remain open to consider recommencing business in that market when conditions improve.  In parallel, ThinkSmart has realigned its cost bases in Europe and Australia for 2009, including a reduction in headcount across operations of approximately 12%. ThinkSmart’s outlook for 2009 is positive:

• Net Debt Free – ThinkSmart enters 2009 net debt free and with $2.3m available cash.
• Recurring Income – Recurring income from ThinkSmart’s Insurance and Inertia revenue lines, which is received on a monthly basis from contracts written in previous years, provides a significant buffer to any recessionary impacts on new business volumes and credit approvals. High margin Inertia revenue exceeded 2008 Prospectus forecasts in UK and Australia and is expected to grow 22% and 7% respectively in 2009. With over 75,000 contracts on its books as at 31 December 2008 Insurance and Inertia revenues should contribute about $60m in revenue over the next 4 years.
• Margin Improvements – Lower global interest rates should deliver improved margins in all Territories and a favourable outlook for currency translation on European earnings should deliver additional EBITDA.
• Warranty Income – In the Australian market, 2009 will see our first full year contribution from income lines received from our Warranty Services product provided with the Dick Smith channel, for which ThinkSmart receives a premium on all warranty contracts written by Dick Smith.

• Security of Contracts – Retailer and funder agreements with all our major partners in Europe and Australia continue until between 2011 and 2013.

• Targeting European Market Share Gains – We are pursuing an aggressive strategy for market share gains in Europe, where we have a significant opportunity this year to widen our distribution channels in both our established Spanish and Italian markets, as well as in France where we will recommence trading this quarter.

In summary, ThinkSmart’s current market valuation represents a multiple of approximately 1 times underlying EBITDA and does not recognise any value from recurring or future income.  While no decision has been made regarding the payment of a final dividend for 2008, ThinkSmart did pay an interim dividend of 2 cents per share in October 2008 which alone represents a yield of approximately 16% on the current market price.[i]