8th September 2015
I've struggled to get much in the way of borrow in HSS Hire Group (HSS), the tool and equipment rental company, capitalised at £100 million. This is a pity, as barring a perfunctory dead cat bounce as the suckers pile in, I've convinced myself it's heading considerably lower.
Any chancers on the long tack may possibly be tempted by its 73% precipitous price decline over the period since its IPO in February last. Yes, February this year! They may even hope some spendthrift will come sniffing to take it private. However, private equity is typically pretty shrewd. And besides, they (in this case Exponent Private Equity LLP) just dumped what they could of the company on the hapless institutions seven months ago, at over three times the current price. I very much doubt they want it back.
Back in February, the IPO offer price was set at 210p per share - at the very bottom of the mooted price range of 210p to 262p per share. Further, the offer raised gross proceeds of £103 million, of which according to its prospectus, up to £13.5 million was earmarked for "underwriting commissions, fees and expenses incurred in connection with the Offer." A bottom of the range float price, and what looks to be hefty fees lined up in getting the float away, should have set alarm bells ringing at the time.
At first glance of the balance sheet, one may consider it presents value. Net assets were reported to be £159 million from the H1 2015 interims to 27 June 2015. Hence, it currently trades at a 44% discount to NAV. However, strip away the £179 million in intangible assets leaves negative tangible assets of £21 million. It may well be wise to disregard the intangibles as according to the group's prospectus:
"A significant part of the goodwill and indefinite life intangibles, £162,376,000, relates to the Acquisition of the business by Exponent on 25 October 2012, and has not been impaired since Acquisition."
Given the fact that the group has reported cumulative losses before tax of £44 million since 2011, including most recently a loss before tax of £14.1 million during H1 2015, it is indeed probably wise to discount the goodwill.
The group also has a less than distinguished record of free cash flow. While operating cash flow appears reasonable pre purchase of hire equipment, by the time the group has forked out for its essential annual tally of such equipment, not to mention high debt service costs, little is left in the way of free cash. I calculate that since 2011, the group has reported a cumulative free cash outflow
of £67 million. This is inclusive of a £47 million free cash outflow in H1 2015, when the group reported an operating cash inflow of £17.2 million, less £42.7 million in purchase of hire equipment, less £12.3 million in net interest cost, less £1.1 million in tax cost, less £7.9 million in purchases of non-hire property, plant and equipment and software.
Net debt at the 27 June 2015 half year stage totaled £197 million, a decrease from £317 million as at 27 December 2014. However, this decline was principally driven by some of the proceeds from the IPO and a conversion of investor (Exponent Private Equity LLP) loan notes into ordinaries.
Despite this, net debt still remains relatively high at 3.8x 2014 EBITDA; peers in the sector such as Speedy Hire (SDY), Ashtead (AHT), Northgate (NTG) are all on 1.9x or less.
The recent interims highlight a precarious cash position of just £4 million, although this is seemingly only as a result of a £9 million overdraft facility. Most worrisome, the interims further highlight that total remaining undrawn committed borrowing facilities stood at £17.6 million as at 28 June 2015, which was down by £20.1 million from £37.7 million as at 27 December 2014. At that rate one could be forgiven for concluding that total facilities available will be de minimis by year end.
The remaining debt may well have some duration to maturity, but given the minimal headroom left, the already relatively high net debt to EBITDA ratio, and the fact that the tangible assets are seemingly already spoken for as security for the existing debt, one wonders if further debt will be forthcoming.
If not further debt, then HSS looks like it's in dire need of an equity issue assuming anyone is content to rescue it. And when considering that HSS has already gone through four owners during the decade past - 3i (2004), Perry Capital/Och-Ziff (2007), Exponent (2012), the hapless institutions (2015) - the chances of a fifth controller seem high.
With what little borrow I've secured, I've sold short at 60p/shr, looking to close at sub 10p.
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