Disastrous results from HMLH

2nd Dec '19 by simonty

15 comments 1151 reads

These results get worse and worse. HMLH delivered strong cash flow, acquisitions, and revenue growth, but negligible profit growth. Price 31p bid. Market Cap £14.2m using 31p and 45.8m shares in issue

Margins. Gross margin rose in the 2012-15 period from about 15.5% to 16.7% at the peak in 1H 2015. Since then they have declined in nearly every period, falling to 11.3% in the period just reported. This is a 34% fall in gross margin. 11.3% gross margin is the lowest it has been in ten years.

Operating margin rose from c5% in 2012 to a peak of 7.6% in 1H 2014. It has fallen dramatically since then and is now at 4.4%, the lowest operating margin for almost ten years. This shows a near halving ( -43%) of operating margin since 2014.

Profit. Though revenue has grown 74% since 1H 2015 ( £15.49m vs £8.92m) gross profit has grown by just 26% over five years (£1.75m vs £1.39m). At the operating level, over the same period, operating profit has grown by just 11% ( £0.688m vs £0.616m).

In the last five years, adding £6.6m of revenue, operating profit has risen by just £72,000 !!!

Acquisitions. Again, using the same period, 1H 2015 vs these results, HMLH has made nineteen announced acquisitions ( listed, as even I am surprised how many there have been: AMP ( gross announced cost £261,000); Qualitas £181k; Clearwater £86k; Castle Wildish £504k; MLP £715k; Coupe £325k; Homes &Watson £364k; Arkleygate £256k; Crown £291k; Goodacre £474k; Gordon £1.7m; Faraday £3.15m; CRC £90k; Dauntons £669k; RBMS £794k; Grillo £62k; FBA £695k; Prima ; Thornes £470k). It was worth listing those, to show how active they have been. Total, gross, consideration paid since 1H 2015 results is £10.06m. Yes, over £10m.

And, what has this added to operating profit ? £72,000. That means, at the margin, c1.5% of additional revenue has been converted to operating profit ( annualising the rise to £150,000).
Economies of scale ? absolutely not.

Staff, margins and profit. In the last annual report there are listed 549 staff. With three acquisitions since then, we could guess at 600 staff now ( I suspect a little higher than that). They have just reported ( and were “pleased to report”) operating profit of £688,000. This is only just over £1000 per employee. How can any company make money…

Unlock with Email

Unlock with Google

Already have an account?
Login here

epo001

2nd Dec '19

Directors are doing OK though. Total director's remuneration is about 480K.

simonty

Where did you get £480,000 from ? Total remuneration last year ( inc pension contribution) was £560,000. At the current profit rate from 1H that is about 40% of operating profit !!!!

August 2018 annual report, page 7. Total 2018 is 477K

Sharing out the money: "1 for you, 1 for me", hands over another 1, keeps 2 for self, "2 for you, 2 for me" ...

There is another set of accounts since then, dated 29 July 2019. Remuneration page 8

So much for Hargreaves Lansdown, who got the website wrong too. Nice writeup, a double bargepole investment prospect!

aflash

Come on now:

HMLH has always been attractive as a very cash generative business. Free cash flow in the last five years has been 2015 £1.8m; then £1.4m; £1.6m; £2.4m; and last year £3.3m. This has allowed substantial acquisitions

You have to make the aquisitions to generate more cash flow!

Otherwise very useful post. Tks

Aflash, it was cash generative anyway. Yes, acquisitions add to cash flow, but if they had stopped acquisitions in 2015, they would still have been throwing off £1m-£1.5m per annum.

My problem is the return they have got in using that cash flow. The return on investment is patently disastrous. If you look at my article of a year ago, I point out that HMLH have spent c£18m on acquisitions over ten years. To have a market cap, after all that, of £14m does indicate there has been significant value destruction. I am not at home so have not got my spreadsheet, but they must be up to close to £20m on acquisitions since Rob Plumb took charge.

It is easy making acquisitions if you have good cash flow. The difficulty is integrating a ragbag of businesses, then making money from them. Again, the numbers show, adding £6m of revenue to add £72,000 of profit is not clever. Massive diseconomies of scale. Quite an achievement !

carmensfella

3rd Dec '19

Apart from integrating the individual businesses once acquired surely the main issue is the multiple paid?......it is not based on profitability and the earnings that will be delivered but moreover a multiple of revenue only. We only know that 1.3x revenue is being used as a figure to set the price....I would prefer the price to be linked to a multiple of profits as these are mainly small deals and are costly to get over the line each time so the cost absorbs the profit even if the revenues do not go away.

A period of consolidating what they have and getting everything reporting to one system and some economies of scale would create a much more attractive company and as the cash is being generated at a healthy rate I am going to stick with this one.

Christopher Mills is building a significant stake so either he will take me out for a miserly 20% gain within the year or the company will get it right and we will see the FinnCap target of double the current share price being met within a couple of years. A win/win for me with very minimal Brexit linked headaches.

David, we do get “profit” numbers for some of them, though the accounts just say “profit” not usually specifying whether is gross, operating, or net. Faraday was stated at acquisition to have £400,000 of pretax profit. Where on earth has that gone ? The following year, in the Accounts it says that Faraday contributed £1.979m to revenue and £274,000 “to the Group’s profits” ( not specifying which line though). Where has that gone ? Pretax profit for the Group rose from £1.303m in 16/17 to £1.464m in 17/18 suggesting that the residual business, without Faraday, dropped profit by about £120,000.

HMLH paid £3,150,000 for Gordon, implying a multiple of about 7.8x pretax profit.

What percentage of the profit do the board take each year and what percentage is handed out in dividends? The rest is clearly being used to buy up additional businesses and revenue but somehow not delivering profit.

Until a time where this expansion delivers additional profit and increased dividends then the board remuneration and any bonuses should be frozen IMO.

4th Dec '19

You're assuming the company is worth anything. At nearly 80% of assets as goodwill or intangibles for "real estate operations" I fail to see it myself. Most of the rest is receivables, the paltry amount of cash is insufficient to keep the directors in the manner to which they have been accustomed.

EPO, the balance sheet is weak on tangible assets as they have been buying intangible assets ( people and goodwill). A pure service business will never have many tangible assets. However, the question would be whether the valuation on the balance sheet is still correct, or whether goodwill needs writing off.

But on “is this worth anything at all ?” Well yes, you have a cashcow. Even with pretty rubbish statutory profits, free cash flow in 1H was £1.39m. Last year free cash flow for the year was £3.3m. That is amazing cashflow at this valuation. The problem is what they do with it. Spending £10m on acquisitions over the last five years that have added only £72,000 of operating profit is obviously insane.

However, if they just stopped acquisitions and ran this for cash, they could build up a large cash pile in just a couple of years. Or, heaven forbid, pay out a few special dividends.

As shareholders have not had any capital appreciation for five years ( and many bought in at Placings at 37p and above) it is worth contrasting the total payout to shareholders £192,000 and to the Board £560,000.

PS, maybe it IS just a cashcow.....for the Board

6th Dec '19

Surely balance sheet is huge on intangibles and goodwill unless I am reading it wrong. From stockopedia page: Mar 31 2019, enterprise value £21.5M, total assets £24.8M, of which Goodwill £11.4M, Intangibles £8.4M. You've obviously spent longer looking at this than I am ever likely to but I totally agree with your final sentence.

Epo, sorry at crosses purposes. I am NOT arguing that the balance sheet is strong. These interims show net assets of £15.9m of which £12.3m is goodwill, and £8.3m “other intangibles”. So, on the face of it, net NEGATIVE tangible assets ( the figures are complicated by IFRS 19 as £5.9m is added as a “right of use” of their leases, balanced by a lease liability of exactly the same amount on the other side. ).

But any service business will be in the same position as they are not buying bricks and mortar, and have no factories. So, say Saatchi has £89m net assets, but £49.8m of those are intangible. WPP has £9.8bn of net assets, but £13.2bn of intangibles ( so, net negative tangible assets).

My point about “is HMLH worth anything ?” Is not about the bricks and mortar to be valued. It is about whether the carrying value of the acquisitions ( represented by the stonking goodwill) is correct. There must be a few acquisitions ( for goodness sake they have made enough of them) that are no longer worth what was paid for them....

Disastrous results from HMLH

Unlock the rest of this article with a 14 day trial

About the Author

Simonty

15 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...