I have bought a few shares in Speedy Hire, the UK tool hire business, at 29.5p/shr as I reckon it should be worth between 45-55p/shr. I like SDY for the following reasons:
- In 2009 it was saddled with debt. Net debt stood at c. £250m. Three years on and the net debt position has been brought down to £76m and I reckon this will have fallen further when it next reports. EBITDA has risen from £34.4m in 2009, to £60.3m in 2012 (Mar year-end), and is forecast (Bloomberg) to rise to £68m this year. Debt is much less of a concern.
- While the outlook is now much more encouraging than in 2009, bizarrely, Speedy Hire is actually cheaper than it was in the trough of 2009. Yes, its market cap is £64m higher than it was in 2009. However, since then, it has raised £100m via equity and generated £75m of free cash flow. That would suggest c. £111m of cash has not been reflected in its valuation, which equates to 70% of its current market cap.
- It has a net asset value of 45p/shr. This compares to its current price of 30p/shr. Even if one were to strip out intangibles (always wise), then its net tangible asset value is c. 35p/shr. In event of the company being sold or liquidated, I actually reckon there to be far higher upside than this. But either way, there is good support there on a tangible basis.
- It generates cash. £75m in free cash flow since 2009, and better prospects going forward. That’s attractive to everyone, especially private equity.
- Private equity has a record of strong interest within this space. Archie Norman’s Aurigo investment vehicle together with the US hedge fund Och-Ziff, bought HSS hire in 2007 for £310m. Last year, Ashtead (AHT, mkt cap £1.7bn) together with Belgium’s TVH Services were reported to be interested in bidding for Lavendon (LVD, mkt cap £244m).
- It’s cheap to peers. Speedy Hire trades on (Bloomberg consensus) an EV/EBITDA multiple of 3.1x forward year EBITDA. This compares to Ashtead on 5.3x, Lavendon on 4.2x and VP (VP, mkt cap £130m) on 4.2x. Even if Speedy were not to re-rate higher, as the debt is paid down the value of this should migrate over to the value of the equity.
The key risks are:
- Pricing pressure in the sector, which anecdotal evidence suggests has eased over recent months.
- Cyclical risks. However, having been in recession for three quarters, the UK economy may emerge at some point. Who knows?
If truth be told, I bought more than a few.
|SDY share price|
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