Small Cap Value Report (1 May 2014) - HHR, CAR, JSG, ECK, RGD, RBN

1st May '14 by Paul Scott

22 comments 37688 reads

Good morning!

Helphire (LON:HHR)

This was one of my most successful investments of 2012-3, since the company delivered a remarkable turnaround, somehow persuading their Bank to write off a big chunk of debt, and raising large fresh funds from shareholders. However, once it became clear that they were copying Quindell's business model, and essentially becoming a company to facilitate fictitious whiplash claims (by acquiring an industrial-scale "personal injury" solicitors), then I sold out, at about 6.7p.

You have to be very careful in this sector, as they dress up their activities in all sorts of deliberately confusing language, but the bottom line is that the big money maker is whiplash claims. Fraudulent whiplash claims are big business, and despite the reality that few people actually suffer serious whiplash, the cost of whiplash claims is now higher than the physical damage done to the vehicles in aggregate, in car crash insurance claims. It is regarded as something like a bonus payment to car crash victims, with payments of several thousand pounds being the norm, irrespective of whether anyone has really been hurt or not. Seatbelts, air bags, crumple zones, etc, mean that real injuries are fairly rare these days, other than in the most serious of accidents.

It is you and I that bear the cost of this widespread fraud, with our car insurance premiums inflated by about £90 each, per annum apparently, to fund the cost of this scam.

The number one rule of investing, is to ask the question, "Are profits sustainable?" In the case of Quindell, and HelpHire, and others the answer (in my opinion) is "probably not". Sooner or later Governement will (and should) tackle this area, and start sending people to prison for fraudulent whiplash claims. When that happens, it will stamp out the vast bulk of claims instantly. People only lie because they think they can get away with it, and are actively encouraged to submit false whiplash claims by intermediary ambulance-cashing companies, and usually won't even be questioned about the authenticity of their supposed injuries.

HelpHire say that Q3 trading has "exceeded the Board's expectations".

Cash collection in HelpHire's historical business (which is the supply of hire cars to no-fault accident victims) has improved further, and is relatively good, at 128 days. However, margins are thin on that line of work,…

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Paul Scott

1st May '14

Hi murrb,

As other people have mentioned, we actively discourage people from blindly following my reports. Instead it's just one person's view of various shares, and intended as a starting point for people to do their own research. Whenever I meet investors, they usually say that they like my morning reports, but often disagree with me about particular stocks - which is great, that's what we want!

I've published details in the past about which stocks I hold, and when I buy/sell, and it causes no end of problems. For one thing, why should I disclose my personal finances at all? I think people have a right to know whether or not I currently hold a stock when I'm writing about it, as that can affect one's view of the share, even if you try to sound balanced there is sometimes unintentional bias. However, nobody has any right to be told if & when I sell stocks, partially or in full.

If we were giving recommendations, or charging for a tipping service, then fair enough. However we are doing neither of those things. These reports are just a view on many shares, after a quick review of results or trading statements. Nothing written here is anywhere near in depth enough to justify a buy or a sell, which is why it's vital to do the more detailed research yourself.

On a general level, if a share has gone up a lot, then please just automatically assume that I will have sold some or all of my holding, as that what I do - top-slicing on price rises, and selling out once a share has reached a fair valuation. It would be extremely unlikely for me to still hold any share that has risen to a valuation of more than roughly 17 times earnings.

The disclosures I have agreed with Stockopedia are that I will disclose in every report whether I hold any shares written about at that point in time. Also I will not comment at all on shares where I have a short position. That's what the agreed policy is, and that's what I stick to in terms of disclosure, and am not going to change that in any way, as it's all that needs disclosing.
It's then entirely up to me if/when I decide to sell. Although I wouldn't ever write anything enthusiastic about a share if I was intending to sell. So the narrative will always reflect my honest view of any share at that point in time.

As regards Helphire (LON:HHR) I think it's obvious from my previous comments that I was cooling on the share. For example, my comments on 5 Dec 2013 mention the large Placing bringing big dilution, and that HelpHire appears to be "jumping on the same bandwagon that Quindell have ridden in the last couple of years", and of course I've been very negative about Quindell for a long time now. I then went on to spell out explicitly my reservations about HelpHire's change in business model;

So I'm very much in two minds about this. On the one hand, competing with Quindell in this space will undoubtedly drive up profits at HelpHire. On the other hand, I really dislike Quindell's business model, and think it will ultimately probably be unsustainable, when eventually the Government/insurers really crack down on bogus whiplash claims. - See more at: http://www.stockopedia.com/content/small-cap-value-report-5-dec-hhr-vnet-qpp-79651/#sthash.Zl2eiJyU.dpuf

and I commented on the negative working capital profile of the new business model;

The other drawback with this business model, apart from unsustainability in the long run, is that personal injury work consumes a lot of working capital - hence the fundraising today, and Quindell's inability to generate any cash (which is why they also recently did a large fundraising, of £200m). - See more at: http://www.stockopedia.com/content/small-cap-value-report-5-dec-hhr-vnet-qpp-79651/#sthash.Zl2eiJyU.dpuf

So having said all that, it surely shouldn't have come as much of a surprise that I'd decided to sell the shares and move on? I can't remember when I sold them, but from memory think it was about 2 months ago. I constantly review my portfolio and make decisions to cut back on things on pretty much a daily basis - e.g. if the market overall looks wobbly then I will usually cut a few positions that have done well recently. It may or may not be anything stock-specific.

So overall then with HelpHire, I liked the original turnaround, having bought in originally at 3.5p, explaining here that despite my loathing of the sector, the shares looked good value, where I said;

Management have a target of £7.5m operating profit for year ending 30 Jun 2013, so at a market cap of £53m, with net debt of only £1.1m, the shares could still be cheap? DYOR as usual of course, I don't hold any, but am tempted to have a dabble here at 3.4p per share, because there could well be a positive reaction to the results announcement in Sep 2013, when people see that the Balance Sheet is now actually very strong, with effectively no debt. - See more at: http://www.stockopedia.com/content/small-cap-value-report-20-jun-sid-hhr-puri-gtc-crx-74402/#sthash.ElNCZsZ5.dpuf

So overall then, my views published here reflect my view of that stock on that day. However, that view is subject to change at any time in the future, and I'm not under any obligation to update readers as to whether I have sold the stock. People need to make their own decisions, based on their own research. Of course next time I write about a stock, it will be dislosed whether or not I currently hold it.

Please also note the disclaimer after every article;

Disclaimer:

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

Regards, Paul.

fek47

Re Helphire (LON:HHR) : the story from the big motor insurers (eg. esure (LON:ESUR) , Direct Line Insurance (LON:DLG) , Admiral (LON:ADM) ) is that premiums are not only falling, but falling sharply. From my own recent renewal quote I can certainly corroborate this - I paid 40% less this year compared to last, with the same insurer on the same car.

Whilst I agree that encouraging insurance fraud does not seem like the most moral of businesses, the downward pressure on premiums doesn't seem to tally with the apparent huge additional costs imposed by whiplash claims?

Helphire (LON:HHR) is a cash-generative business, and therefore is a completely different ballpark to Quindell (LON:QPP). With the positive references to cash collection in today's announcement, I remain a holder.

murrb

Paul, I have been reading your posts for a few months gratefully as a novice investor who is looking for better returns than currently available in bank savings accounts. I have learned a great deal having started out knowing very little. However, when I bought HHR my decision was based in part on the assumption that if you had, then it was a fairly safe steer, albeit that I realise that it is up to me to make my own decisions. I don't believe you then published that you had sold but I am still a holder and I hope not to discover I have bought a share which will go the way of quindell. As your posts are read by many, your comments today, unexpected, as I assumed you were still a holder, leave me feeling a bit vulnerable.

Hi fek47,

Interesting points, thanks.
Quindell's business model seems to be to industrialise whiplash claims, and thereby reduce the overall cost. My reading of the situation is that the insurers are apparently happy to continue being ripped off, but to a lesser extent than previously. It's the public who bear the costs. So unless/until we campaign to end widespread insurance fraud, then Govt is not likely to act.

Companies like Quindell and HelpHire are, in my view, built on very wobbly foundations, hence best avoided.

Regards, Paul.

mrmodha

murrb,
As you say you are a regular reader I am surprised you haven't seen the multiple reminders from Paul that this blog is not a tipping service, and as such he is not required to tell you what he buys or sells - this blog should only be used as a tool to generate ideas and then do your own research and MAKE YOUR OWN DECISION. Remember, the money you plough into shares is your own, so to blindly follow someone else, who could be right or wrong in an investment is down to you!

Actually, I think you misunderstood my point. I do not regard this as a tipping site. Fek 47 made my point better than I did. It would seem from today's RNS that there is no change in the status of HHR, it is merely Paul's view of it which has changed.

superrupededupe

"However, when I bought HHR my decision was based in part on the assumption that if you had, then it was a fairly safe steer...your comments today, unexpected, as I assumed you were still a holder, leave me feeling a bit vulnerable"

I think that Stocko should consider putting a general disclaimer as a permanent header or footer to the daily report to avoid novices making assumptions that leave them feeling vulnerable.

I find the Small Cap report my most single useful investing resource and have followed it since long before it arrived on Stocko. However it is only useful as a starting/prompting point for your own research and decision-making process or a counter-balance/corroboration of your own independently held views.

In my case it is particularly useful as it covers an area of the market which I'm especially interested in, but it is arguably a "riskier" area of the market (you are dealing with sometimes very small companies where it doesn't take much of a slip betwixt cup and lip to decimate profits, on top of which they are often listed on the less regulated AIM market).

Paul's analysis is often so detailed (and useful) and his views so strident (which is part of the appeal) that he will polarise opinion. We've seen this with the muppets opposing his bearish views of certain stocks, but there is also a danger that he attracts less vocal 'disciples' who follow his every move and to whom he apologises if a share he likes hits a bad patch.

Perhaps we need to add another meaningless acronym to the self-evident DYOR.

YWBTIIS - You Won't Be Told If I've Sold

RichardK

Paul
Re Carclo which I was rash to buy for 170 after the first profits warning. H1 to Sept 2013 showed revenues of £45.4 mn (H1 2012 £40.0 mn). Of this, Conductive Inkjet Technology (CIT, which is the focus of the profit warnings) accounted for £1.38 mn (H1 2012 £0.267 mn). CIT has been a fast growing but small part of t/o, and had been hoped to be a star performer. Even if it disappears, it is hardly a disaster.
Net debt at £14.2 mn is high compared to H1 pre-tax profit of £1.8 mn, as is the pension fund deficit of £8 mn, so I will not be risking any more, even at today's price.

Thank you for you excellent analyses

Richard

cig

You can't pick and choose what third party claims your cover includes (it's the guys who crashed into you whose insurance pays) so this needs legislative action.

shanklin100

Hi Richard

Surely CIT has been the jam tomorrow part of Carclo's business for the last 5+ years, with lots of investment and hope but no meaningful delivery of sales or profits, which is seemingly now being overtaken by other technologies. Without this Carclo is a far less exciting company on an excessive P/E. Arguably this is the case even after today's 27% SP fall.

All IMHO, DYOR.

Cheers, Martin

PhilHofGrowYourDough

I'd argue that if you aren't feeling vulnerable when investing in the stock market then you shouldn't be playing the markets at all.

Feeling comfortable after having someone else tell you a stock is ok is a convenient way of abdicating responsibility for the decisions.

Regards
Phil

britishb

Yes Cig, you are of course correct. Tx for correcting my nonsensical idea. Probably only the regulators can stop these crazy claims - just like they've stopped a lot of ghastly referral fees recently...

Crusty

It's not fashionable to stick up for Quindell, but I do not believe they are one of the 'nasty' companies such as the rip-off car hire merchants you were so keen on a while ago. My take FWIW is that QPP contract with insurance companies to process claims. This they achieve far more efficiently than the heretofore mixture of ambulance chasers and rip-off merchants by using their own affiliates of lawyers, repair shops and medical advisors. In this way claims are MINIMISED ( unlike the Accident Exchange model) because there is no inordinate delay built in to maximise car hire etc. Unfortunately they do not receive cash up front, so the expansion phase costs cash flow. Furthermore their telematics and software systems have the potential to reduce costs (and increase profits) for insurers, and reduce premiums for you and me.
Of course, I may be living in La-La land, and it may be nonsense, but please give up the libellous innuendo associating Quindell with whiplash frauds, unless you have evidence.

You obviously haven't read Cannacord's note on the company then, in which they detail that most whiplash claims are either exaggerated or completely fictitious. So repeating that is not in any way "libellous innuendo", it's a matter of fact.

P.

shipoffrogs

You could check their involvement by simply googling "whiplash" - they appear number two on the results. Clearly, though we're not making enough claims, their site says:

"..it's shocking that 7 out of 10 people in the UK who were injured don't bother claiming the compensation they are legally entitled to. Don't become one of them!"

jonesj

Agree fully on the whiplash issue, the government should take action.

The only way that's going to happen is if they think it will win votes, so probably time to write to your MP.
Unfortunately my MP is the utterly useless Nadine Dorries. That's another thing we need -a democratic mechanism to remove unsatisfactory MPs from safe seats, without having to vote one in from a different party.

rick

Whiplash claims from road accidents 'on the increase' (See http://www.bbc.co.uk/news/business-19946766). This is a story from 2012. And the rise dates back much further in time. It is a well known issue in the insurance industry. Arguably it now getting less of an issue as it is now a well understood issue and claimants have a well defined profile. Assessment of claims by medical staff is now routine. This issue came along long before before QPP and HHR. Not sure what %age of profits come from this for either company. Any insurance experts out there?

Of course Quindell deals with whiplash claims as part and parcel of their service, but do not encourage such claims - why would insurance companies contract them should that be the case? If you google 'whiplash Quindell' you will find the top story shows how they seek to mitigate the cost of claims - quote - "For many cases in the acute stage of injury, for example less severe whiplash injuries, face-to-face treatment is not always required" etc, which hardly suggests they take them all to Harley Street. Further down the google list there are indeed all sorts of calumnies, some originating from .... er...Stockopedia, the most recent dated today.

BTW I have no sympathy whatsoever with fraudulent insurance claimants or shorters talking their own book.

extrader

Hi Crusty et al,

As I recall, the core issue with whiplash claims is that these total around £ 2 billion a year, whilst NHS outgoings for 'whiplash treatment' is about £ 80 million a year.....

So there's an awful lot of money that isn't going to pay for the stated purpose, however you dress it up !

A 'serious, competent' government would look into - and deal with - this discrepancy.

Well, as the Italians (who know about these things) say : a fish rots from its head .

ATB

mrwhits

23rd Jun '14

Hi Paul,

Looks like you were spot on re REDD.L claims...

http://www.confused.com/car-insurance/articles/new-bid-to-crack-down-on-whiplash-cheats?MediaCode=806&utm_medium=email&utm_campaign=NewsletterMR20140623&utm_source=Newsletter

Small Cap Value Report (1 May 2014) - HHR, CAR, JSG, ECK, RGD, RBN

Helphire (LON:HHR)

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Paul Scott

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