Small Cap Value Report (27 Nov) - HHR, ABM, KBT, PUR, IDH

27th Nov '13 by Paul Scott

12 comments 15817 reads

Good morning! I'm encouraged by today's AGM trading statement from Helphire (LON:HHR). This is a turnaround situation, where a company providing credit hire cars (for no-fault accidents) had been a complete disaster for investors, but transformed itself with a remarkable refinancing earlier this year, which eliminated ALL its debt. This turnaround first caught my eye here on 20 Jun, when the shares were 3.4p, and they have since re-rated decently to about 5.4p.

Their trading statement today sounds pretty good to me. The key sentence says;

"The Group's new financial year has begun well. Trading profits for the first four months of the year are ahead of the corresponding period last year. Early indications are that this trend has continued during November and the Board is confident about the Group's prospects for the financial year as a whole."

It goes on to say that debtor days is consistent with earlier this year, at 128 days (but improved from 153 days at 31 Oct 2012). Debtors is the bane of this sector, and is what killed Accident Exchange, and is a key area of uncertainty at Quindell Portfolio (LON:QPP) (I haven't mentioned that one for a while!).

So be sure to look at all Debtors, not just trade debtors, when scrutinising the accounts in this sector, as a certain amount of window-dressing goes on, with key figures sometimes only quoting part of debtors.

The Balance Sheet turnaround at Helphire is quite astonishing - they report net cash of £4.3m at 31 Oct 2013, which compares with net debt of £101m a year before! That's not a one-off either, they have cleared all their debt through an equity raising, a debt write-off, and transforming the collection of debtors. The company is now focussed on paying dividends, and they say this on that subject;

^{"In the absence of unforeseen circumstances, the Board intends to announce a second interim dividend for the current year as part of its announcement of results for the six months ending 31 December 2013. The Board expects the second interim dividend to be 0.171 pence per ordinary share (approximately £ 2.7 million in aggregate). The Group's dividend policy is unchanged since the refinancing and remains to distribute as much of the Group's…}

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Funnymoney

27th Nov '13

I look at all that green and think "this has to be too good to be true". If not, shouldn't this be much higher?

Tamarix

And it has a PE of 3.

Paul Scott

Guys, pls could you include the company name, or ticker when commenting, as otherwise it gets a bit confusing!
I presume both comments are about Helphire (LON:HHR) ?

rgwarner

Hi Paul
Do you have any thoughts on Telford Homes (LON:TEF)?
Highlights include moving to net cash (no gearing); 85% increase in dividend (although a low absolute figure); and 80% of FY 2015 stock already sold.
The price shifted significantly over the previous couple of days in anticipation of the figures; very slightly down today. Would be good to get your thoughts if possible please.

Thanks
Rich

Hi Rich,

I've missed the boat on housebuilders, so am not looking at them (although Inland Homes was one of my best performing shares earlier this year).

Also, I feel that the UK housing market is a dangerous bubble (especially in the South, where despite the name, Telford Homes operate), where artificial demand is being created through record low interest rates, and the lunacy of the Help To Buy scheme.

This will all end in tears when interest rates rise, which I think they will have to next year. The Bank of England might want to keep interest rates down, but I think we will inevitably be moving into a higher inflation world in coming years, as the long-term impact of QE money-printing sets in.

Hence to my mind people should be planning for possibility of 5-10% base rates (which might prove necessary once QE has stopped working, and the pound has to be supported with higher interest rates), which would completely kill the housing bubble - think 50% falls in price, and negative equity all over again.

I'm not saying that scenario will definitely happen, but it's quite a likely possible outcome in my opinion. Therefore any investments that rely on current artificially high house prices looks very risky to me.

Cheers, Paul.

man741

Paul, have you an update on the companies who you met with this week?
Robert

cr6196

The fundamentals with Helphire look pretty concerning...the government is looking at the increase in claims cost, they have already banned referral fees to lawyers in personal injury cases, credit hire companies are clearly the other major culprit, and insurers try to avoid using companies like Helphire wherever possible because it leads to excessive claims...not really sure this is a legitimate business as it really just exploits the information asymmetry in not at fault cases to overcharge insurers for something they could get cheaper in a properly functioning market (and do when they have the choice).

SevenPillars

In reply to Paul Scott, post #5

We already have relatively high inflation in terms of everything we need, i.e. energy costs, food, shelter, etc and yet this really isn't reflected in terms of the official inflation rate because those indices are open to manipulation and an over concentration on non-need consumer items that are often falling in price. I have no faith that CPI or RPI will ever reflect the real inflation figure, after all, house prices have never been included and it's not like they've been in a bubble is it!

I'll be astonished if the BoE ever gets to 5-10% interest rates, mainly because the last few years should have taught us that they are experts at fiddling it. At best I think we might get to 2%, which of course would be a significant rise for those who have managed to borrow at 1% or lower, but let's not kid ourselves, the vast majority of ordinary people who buy on credit already pay way more than the BoE base rate anyway. That figure is really only significant to the financial elite who can take advantage of it.

Hi cr6196,

I think you're a bit out of date with your comments. The credit hire sector has radically reformed in recent years, and companies like HelpHire now operate on a collaboration model with insurers - that's how they've managed to get debtor days down to just 128 days. Whereas if you think back to the conflict-based business models of a company like Accident Exchange, they just couldn't collect in the debtors, which got later & later, until the company hit a financial crisis. I seem to recall their debtor days was something like 18 months at the worst point?

Bear in mind also that HHR's largest shareholder is Aviva, with 17% of the company, so one assumes they must work co-operatively with Aviva.

I have more concern over the business model of Quindell Portfolio (LON:QPP), where once you penetrate their deliberately confusing descriptions, a large part of their profit seems to come from "personal injury" - i.e. whiplash claims, a very large number of which are fraudulent claims by people who know they can get compensation with no questions asked.

HelpHire is now just a broker for car hire really, providing a service that is needed, and not overcharging. Hence why they get paid promptly by the insurers.

Regards, Paul.

MrM

Regarding Albemarle & Bond, there's a good article on FT Alphaville today, about how high risk lending moved from sub-prime into pawn-shop lending.

You won't like this article if you're a gold bug:

"But here’s the thing. Just like with houses, when the music stops — i.e. when everyone who ever wanted to protect wealth in gold has done so, and the price has moved about as far as it can — there is suddenly a mismatch between those continuing to want to borrow against gold, and those prepared to fund it."

http://ftalphaville.ft.com/2013/11/27/1706822/the-golden-subprime-swan/

I definitely agree about QPP but I am still not convinced about HelpHire. I have taken almost the opposite view of what has happened in the industry. Insurers always used to collaborate with CHOs because they got paid a nice referral fee (around £300 per incident, I am told) for sending business to them. Motor insurers were struggling to grow and turning to "additional service revenues", as they call it, so this was welcome.

The reason why the industry is changing is because the huge increase in premiums that increasing claims cost triggered has started to reverse (due to regulation). It is cheaper for insurers to use their own network ("direct hire") and some (those that don't own CHOs) are making bilateral agreements to handle not at fault claims within their own networks. The other tactic is to try to arrange fixed fee deals and some insurers have set up teams just to squeeze CHOs. Finally, it is pretty clear that the increase in claims cost is correlated with increasing use of CHOs.

For me, the question isn't whether this is a 'bad' service. It quite clearly is and this would be confirmed by talking to any insurer/analyst who doesn't have a vested interest. The question is whether HelpHire can take enough money out of the market to justify the valuation. Insurers still use HelpHire because other insurers, presumably Aviva, keep referring. As the motor market continues to soften, insurers are going to have to scrutinise claims management and, now that regulators have dealt with lawyers, two other obstacles remain: repairs and CHOs. The business won't cease to exist, referral fees are too enticing, but this seems very speculative to me.

Sorry for the length but just wanted to fully outline my thoughts :)

Crusty

I'm not sure the models of Accident Exchange and Helphire are all that different, and wouldn't touch either with the proverbial. As far as QPP is concerned, they seem to aim for contracts with insurance companies involving claims handling from start to finish, including car repairs, lawyers and health claims. If, as I believe, these align the interests of insured and insurer against those of exploiting third parties, amongst whom the car hirers and ambulance chasers are the worst, then they have a great future. Lots of 'ifs' though.

Small Cap Value Report (27 Nov) - HHR, ABM, KBT, PUR, IDH

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Paul Scott

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