HMLH continues to frustrate. The acquisition strategy does not yet seem to be paying off. Margins remain under pressure. In c.2015 there was a major investment in IT, HR and Compliance: all part of “growing up” and becoming a larger company. However, in repeating the mantra that “we have higher standards than anyone and want to do things properly” there have been new costs that been incurred each year. Management does not hide this and flagged at the 2017 Prelims that “we remain confident in our ability to manage and balance the growth in our business with the need to improve the infrastructure necessary to support it” ( my italics). At the 2018 Prelims they referred to extra premises costs associated with the move of some back office functions to Croydon. The interims stated that in 1H they “implemented significant operational change” but flagged that in 2H they would be “streamlining our systems onto one database platform”. These results say “This [centralisation] has inevitably incurred reorganisation costs.” More change, more disruption, more cost.
So, while revenue continues to grow at HMLH, profit and margin growth fall behind. All years quoted are for the March year end of that year
1. Added value. I have made a table of all acquisitions since listing. HMLH has spent £18m on acquisitions in just over a decade. This compares with a market cap today at 33p of £15m. HMLH listed in June 2006 with an initial market value of £2m. This suggests that value has been destroyed. The £18m is the announced total consideration, gross, including deferred contingent consideration ( see 12 below). HMLH appears in the past to have paid most of the contingent consideration due. If no deferred had ever been paid, the total initial consideration paid was still £13.5m.
2. Added value 2. In the four year period March 2015-19, HMLH spent £9.9m on acquisitions (assuming deferred paid in full). This has helped add £10.9m in revenue ( 2014/15 v 2018/19) an increase of 63%. During that time, operating profit has risen from £1,160,000 to £1,736,000 an increase of £576,000. Or, put another way, only 5.3% of additional revenue has been converted to operating profit.
3. Where has the profit gone ? Since 2014, some of the acquisition RNSs gave summaries of the financial position of the acquisitions. For example, the 2018 AR states that Faraday contributed £1.979m…
I guess the key question is.....What needs to be done to maximise shareholder returns from here ?
1. Stop buying companies ?
2. Change management ?
3. Increase dividends substantially as cash generation is good ?
4. Find the benefits of scale that have so far not happened ?
5. Sell the company ?
It has gone nowhere for five years and the dividend is minimal so we need something to happen.....What do others think?
