HSS Hire (LSE: HSS) lost 27% of value in early trade today, and is still down 20% at the time of writing — all of which begs the question: is it a good time to buy its stock right now?
A few elements suggest you would do well to wait a bit longer…
Trading Update
The drop came in the wake of a disappointing pre-close trading update for the six months to 27 June 2015.
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Its trading performance through Q2, HSS said, “was marginally below expectations, primarily impacted by weakness in Key Accounts customer activity across a number of sectors particularly in April and May, as well as reduced demand for cooling equipment during the period,” although the group also noted that in June customer activity began “to return to more normalised levels, with order books building into the second half of the year“.
HSS also said that it believes that it continued to take market share over the period and “consequently expects to report high-single digit organic revenue growth for Q2 15“, adding that such a performance for revenues, combined with the start-up costs of new branches in their first year of trading, “is expected to result in H1 2015 adjusted Ebitda in line with the comparative period in 2014.”
That doesn’t look good enough to warrant my attention, and here’s why.
Stock Value
The shares of this British tool hire company hit a new low for the year when they traded at 133p earlier today — admittedly, they changed hands at around 146p at 10.20am BST, but there remains a doubt that strength in its stock price around this level may not last.
HSS was listed on the stock market earlier this year, when its shares were priced at the low end of the indicative 210p-262p guidance, for an implied market cap of £325m. The stock already came under pressure on day one, as investors did not digest the fact that Exponent, its private equity owner, would still retain about 50.4% of the voting rights, a stake that would drop to 47.4% assuming an over-allotment option was exercised in full.
The second-biggest tool hire group behind Speedy Hire in the UK, HSS Hire doesn’t strike me as being at that stage of growth where its stock should command a premium, offering a compelling reason to be a core holding in a diversified portfolio — no growth in adjusted Ebitda in the first half of the year testifies to that.
Its latest update was rather disappointing, and came after a first-quarter update that showed:
- Revenue up 15.3% to £72.5m (Q1 14: £62.9m), with organic growth of 13.2%;
- Adjusted EBITDA up 9.2% to £15.4m (Q1 14: £14.1m);
- Lower net debt at £167.3m at end of Q1 15, which was in line with expectations post IPO (Q1 14: £214.2m).
When the IPO was priced, chief executive Chris Davies said that the group was delighted to have completed the IPO process successfully and, with proceeds from the IPO, its growth rate would have accelerated. The stock is down 30% since HSS was listed.
At its current price, its forward enterprise value (EV, market cap plus net debt) is about £475m, assuming constant net debt into 2015 — and that is in line with the EV of Speedy Hire, which trades on a forward EV/Ebitda multiple of about 6x ( Speedy Hire hasn’t grown much in recent times).
If Ebitda doesn’t grow year on year, HSS’s forward EV/Ebitda multiple would stand in the region of 7x, and for me that’s a good enough reason not to consider its stock as a bargain following its recent weakness.
