Interim results for tool and equipment hire group HSS Hire (LSE: HSS) pushed down its stock 35% today.
At the end of June, when its pre-close trading update was released, I warned you: “A few elements suggest you would do well to wait a bit longer” before investing in it. Its stock plunged 26% to 134p back then, and ever since its market cap has halved — so are there any signs that this is the right time to secure a bargain deal, snapping up HSS stock at 84p a share?
Let’s delve into some of its key financial metrics.
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Guidance
“Results (were) in line with guidance issued in the pre-close trading update issued 29 June 2015,” the group said — so why did the shares plummet today?
Soon after HSS warned investors two months ago, market leader Speedy Hire — whose stock fell almost 4% in early trade today — also signalled challenging trading conditions, which impacted its performance in the first half of the year.
As a result, its valuation dropped 30% to its 52-week, multi-year low of 49p on 1 July. Yet investors seem to prefer Speedy over HSS, which is still controlled by Exponent, a private equity house.
Interim Results
On the face of it, HSS’s half-year results were not too bad, but they indicate that HSS may struggle to be profitable at the end of the year, and that is a risk you’d likely want to avoid because you are paying high multiples for its stock. Operational difficulties are a problem for its fast-rising dividends, too.
Check this out:
- Revenues are up 12.1% to £146.4m (H1 14: £130.6m), with organic growth of 10.6%
- Adjusted EBITDA is flat at £28.9m (H1 14: £28.9m), due “to plc and new branch start-up costs”
- Adjusted EBITA is down to £4.5m (H1 14: £11.3m) as “investment in fleet led to higher depreciation”
- Basic and diluted loss per share of 10.51p (H1 14: 19.61p)
- Underlying basic and diluted loss per share of 4.45p (H1 14: 6.03p)
- Interim dividend of 0.57p per share announced, payable in October 2015
The way it looks, Ebitda (earnings before interest, taxes, depreciation and amortisation) might come in significantly lower than the market had expected, and HSS’s stock price is adjusting accordingly.
Losses & Covenants
Losses per share are lower year on year, but savvy investors surely have noticed that its net debt was £197.2m at the end of June, down £109.2m from £306.4m one year earlier.
“The financial covenant in place on the group’s revolving credit facility at 27 June 2015 is a minimum Ebitda of £35m on a rolling twelve month basis,” HSS says.
Bank covenants set how much debt a borrower can keep on its books depending on certain financial metrics — Ebitda, in this instance. So, assuming annualised 2015 Ebitda of £60m — which could be lower — its implied net leverage would be above 3x.
HSS should be safe on this basis, but I really need to check its next quarter’s performance before committing to it. I also need more clarity about the exit strategy of its owner, Exponent.
Of course, this is a blow for the arrangers of its IPO. HSS was listed on the stock market in early 2015, when its shares were priced at the low end of the 210p-262p guidance. Then, its implied market cap was £325m. Now, its equity value is £123m.
