The Evil Diaries: HSS Hire Group, Glencore, ISIS and 45 Years

I point readers to the parable of the ox from Saturday’s FT. Perhaps a popular revulsion at the misallocation of resources to regulation can be kicked off. My further objection has always been the presumptuous nature behind the law relating to regulation and the conduct of the regulators themselves. But at least a start is marked out.

Money button 1: I have received “I’ve struggled to get much in the way of borrow on HSS Hire Group (HSS), the tool and equipment hire company, capitalised at £100 million. A pity, as barring the perfunctory dead cat bounce as the suckers pile in, I’m convinced it’s on its way to zero.

Any chancers on the long tack will probably be tempted by its 70% precipitous price decline over the period since its IPO in February. Yes February this year. They may even hope some fool 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 almost half of the company on the hapless institutions seven months ago at over three times the current price. I 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 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 37% discount to NAV. However, strip away £179 million in intangible assets leaves negative tangible net assets of £21 million. It may well be wise to strip the intangibles away 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 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, 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 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, Ashtead, Northgate 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 worryingly, 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 administration, I plump for an emergency rights issue, which could wipe out the current holders.”

It is extraordinary that such a flotation was ever achieved.

*****

Money buttons cont.: “Three coins in the fountain (which one would the fountain bless?)” as rendered by Frank Sinatra has always seemed to me so engaging that I have overlooked the profit angle. This is that nowadays about 3,000 Euros are chucked into the Trevi fountain every day. I thought these few coppers were not worth the trouble – but that was admittedly thirty plus years ago. Time to call in Glencore (GLEN). Every little helps.

*****

Archbishop Carey, the man with the drain-like voice, thinks we should bomb ISIS into submission. I thought we were already bombing. So I suppose this intervention was inspired by a need to prepare the Great British public for putting boots on the ground without which bombing is pointless. This development, probably necessary, will get a lot worse.

*****

Finally, film review: Not that she’d remember me (understandably) but I encountered Charlotte Rampling fifty years ago for two seconds. So her flicks have always had to my mind a special appeal. Last night my wife and I trotted over to the Curzon cinema in the King’s Road to see 45 Years. We should have been warned that this is how long the film feels rather than summarising the film’s theme.