Haynes Publishing Group (HYNS) - Turnaround on Track

With the recent sad closure of the Motley Fool bulletin / discussion boards (http://boards.fool.co.uk/closure-of-the-uk-discussion-boards-13456218.aspx?sort=whole) which I know were enjoyed by a large number of investors, including myself, over many years, I was recently reminded of the well-respected investor and bulletin board contributor @Carmensfella and his ‘SLINKY’ acronym for identifying decent small caps for further research.

I have had some success myself with the odd SLINKY here and there, starting with Sweett Group (CSG) which I highlighted at 28p back in June 2015 (but was buying at sub-20p too) and who were later acquired by Currie and Brown at a healthy premium of 42p (circa 100% gain), and most recently with Waterman (WTM) which I highlighted at 55p in Dec 2014 and were acquired last week by CTI Engineering for 140p (a 250%+ gain).

http://boards.fool.co.uk/sweet...

http://boards.fool.co.uk/waterman-wtm-a-slinky-13140560.aspx?sort=whole

With some spare funds currently available for reinvestment,   I thought I would flag up another potential 'SLINKY' to spark some debate. This time its…..

Haynes Group Plc (FULL: HYNS) - A SLINKY?

https://haynes.com/en-gb

https://investor.haynes.co.uk

What do they do?

The Haynes business model is summed up on the Haynes website nicely as follows:

“John Haynes OBE wrote and published his first book, on building an Austin 7 Special, whilst he was still at school in 1956. The first 'proper' Haynes Owners Workshop Manual, for the Austin Healey ‘Frogeye’ Sprite, was published in 1966. Based on the strip down and rebuild of the project vehicle and with extensive use of step-by-step photographs – a process that has not changed to this day – this manual set the standard for the Haynes brand and started what is now a globally recognised publisher of practical information”

After establishing their HQ in Sparkford, Somerset in 1972 they formed a US Company in 1974 and listed on the London Stock Exchange in 1979.

Their website continues:

‘The Haynes Group comprises two geographical business segments :

• UK & Europe

• North America & Australia

  The UK & European business has headquarters in Somerset, England and subsidiaries in the Netherlands, Italy, Spain, Romania and Sweden. The core business of the UK and European operations is the supply of automotive and motorcycle servicing and repair information to the DIY aftermarkets in both a printed and digital format as well as the supply of technical data to the European professional automotive aftermarket which is delivered digitally in over twenty different languages. There are currently over 180 online digital manuals available together with over 600 automotive printed titles in publication and in excess of 40,000 subscribers to the HaynesPro professional data throughout Europe. The business also publishes over 300 general DIY titles which are practical, instructional, easy to read and aimed at those with an interest in more general non-automotive related activities.

  The North American & Australian business has headquarters near Los Angeles, California and publishes DIY repair manuals for cars and motorcycles in both a printed and digital format. The US business publishes titles under the Haynes, Chilton, Clymer and Intertec brands and in both the English and Spanish languages. It has a branch operation in Sydney, Australia which publishes similar products under both the Haynes and Gregory brands. The Australian business also publishes information for the professional automotive market. The North American and Australian business currently publishes over 400 online digital manuals and in excess of 1,300 printed titles. Through its print facility in Nashville, Tennessee, the North American business is the central print facility for the Group’s print products.

  The success of the Haynes business is underpinned by an attention to detail and a passionate dedication to providing independent and trustworthy instructional advice. This simple but important philosophy lies at the heart of what we do. The fact that all Haynes Manuals are based on a complete vehicle strip-down and rebuild in one of our workshops, so that the written and photographic instructions for our customers are inherently practical and easy to follow, can sometimes come as a surprise to those new to the Group but for those accustomed to Haynes, this renowned attention to detail will be a familiar concept. With over 50 years of experience in this market sector, we have deeply embedded processes, inbuilt expertise and procedure driven efficiencies which help to give Haynes its unique identity.

  For our professional product ranges the data collection process is slightly different but the uncompromising Haynes approach to detail remains unchanged. The technical and maintenance data produced by HaynesPro is of necessity based on the Original Equipment Manufacturers (OEM’s) information and servicing schedules. Under European regulations independent garages are legally entitled to carry out normal maintenance and repairs during a vehicle's warranty period, without invalidating the warranty conditions, provided such work is carried out in accordance with the OEM’s servicing schedules. It is therefore essential that the same level of detail also applies to our range of professional products to ensure the technical data is clear, concise, accurate and conforming to the relevant OEM’s instructions.’

  In summary Haynes have three distinct businesses streams, namely:

1. Technical data and information for professional vehicle mechanics (HaynesPro). This part of the business was created when Haynes acquired Vivid (a Netherlands based company) in 2008.
2. Printed and digital automotive manuals for domestic consumers and garage owners. This is what most people know and associated Haynes with i.e. a grubby car manual on a shelf in your garage. Haynes has sold over 150m of these manuals of which there are circa 2000 titles covering the UK, US and Australian markets.
3. ‘General Interest’ manuals covering a very broad spectrum of subject matter from musical instruments, pets, military, sci-fi, sports/fitness, computers, fishing, bikes, beer and family. Titles such as their  ‘Bike Book’ have sold over 1m copies and the typical reviews on retailer sites such as Amazon demonstrate that the Haynes brand (accuracy, clarity and attention to detail) has not been lost when moving away from their more famous automotive titles; a significant number of general interest titles achieving 5 stars.

So, is this a ‘SLINKY’ company?  Let’s find out…

SMALL
With circa 15.1m shares in issue at a current offer price of circa 164p, the market capitalisation is only £24.6m and hence falling within the definition of a micro-cap. Investors should note that of the allotted, called up and fully paid Share Capital, there are 9,000,000 ‘A’ class shares held by the Haynes family with the Group holding a further 1.24m shares in treasury. Hence there are in fact only 6.1m shares in circulation of which the free float is circa 3m shares.

One thing I like from a Corporate Governance perspective is that even at this very low market cap Haynes has a full LSE listing (FTSE fledgling) rather than AIM which is a notable bonus. This was equally an attraction when I was originally researching Waterman (WTM) back in 2012.

Tick….

LOWLY RATED

So how about its rating and valuation?

The full year to 2016 produced EPS of 7.6p (PE 16) with house broker Panmure forecasting EPS of 8.8p for 2017 (PE 14) rising to 11.6p in 2019 (PE 10.5), so not exactly ‘cheap’, however, there is more to consider here than just PE with respect to valuation that I will cover later.

Investors should firstly note that the Haynes business has recently gone through at least 2 years of significant change including some chunky cost cutting, ongoing disposal of assets and a change in senior management and this transitionary period therefore requires some leniency when using financial metrics and making comparisons.

Personally I always find it helpful to compare any potential investment to its peer group and in the case of Haynes (Media & Publishing) this includes the likes of Quarto, Bloomsbury Publishing & Johnston Press. Metrics I particularly like to compare include Price / Book, EV/EBITDA and EV/Sales and in the case of Haynes this throws up some interesting numbers:

Whilst Haynes has a P/B of around 0.95 its peer group median is around 1.7; equally EV/EBITDA for Haynes is 5.1 against a peer group comparison of 11.6 (median), and lastly EV/Sales for Haynes is 0.85 against a peer group median of 1.15. 

With the share price having moved up from around 100p a year ago to the current price of 164p, the market has already picked up on the potential value of Haynes, however, I am personally satisfied that the rerating has not got ahead of itself and has further to go.

Tick…

IMPROVING TRADING CONDITIONS & INCREASED EARNINGS
A ‘SLINKY’ should demonstrate a nice trend of growing turnover and earnings suggesting a relatively reliable situation, so how does Haynes score here….

Revenue:
2012: £29.8m

2013: £27.6m
2014: £29.3m
2015: £26.1m
2016: £25.7m
2017: £27.6m (Est)
2018: £29.7m (Est)

So not great on a historical basis, however, given the significant (positive) changes made by the business over the last couple of years, paying too much attention to historical turnover is not particularly meaningful other than its relative stability.

Let’s look now at profits….

Profits (Pre Tax):
2012: £4.71m

2013: £3.19m
2014: £2.03m
2015: -£7.25m
2016: -£2.55m

2017: £2.1m (Est)

2018: £2.4m (Est)

So clearly a historically declining record of profits, although 2015 and 2016 bore the brunt of a much needed strategic review followed by a ‘global operational, cost and structure review’ although  its important to highlight that at an operational level the Haynes business has always made a profit.

House broker Panmure Gordon forecasts a return to top and bottom line growth in the current year top May 2017 with PBT of £2.1m and EPS of 8.8p increasing to EPS of 11.6p in 2019.

So how exactly are they going to do this? Well, it’s a combination of the following:

1) Continued growth at HaynesPro (http://www.haynespro.com/)

HaynesPro provides technical data to automotive garages across Europe and has grown from revenues of only £6m five years ago to now accounting for around a third of Group revenues.   Revenues from Haynes European business (which is largely HaynesPro but includes UK manuals) were also up by 25% as noted in the January 2017 interims and are growing strongly.

 Haynes also acquired OATS for £2.4m in December 2016 to complement their current professional market offering. OATS was founded in 1984, was an existing supplier to HaynesPro, and is a small but global lubricant data solutions provider with key synergies with HaynesPro in the professional automotive market.   House Broker Panmure Gordon noted that the acquisition is a ‘strategic fit’ and duly increased EPS forecasts by 8% for FY 2017.

 It is also worth flagging here that Autodata (HaynesPro competitor) was sold for £340m in January 2017 having previously been sold for £143m back in 2014 and highlights the potential value of HaynesPro, albeit AutoData has a much large customer base. http://www.motortrader.com/motor-trader-news/automotive-news/solera-buys-workshop-data-specialist-autodata-06-01-2017

2) Consumer operations (manuals) being rationalised and expanded into new digital areas.

The consumer / DIY manuals that we all know and love have suffered over recent years from a significantly slowing demand especially in Australia; not helped by previous senior management who appeared to let this part of the business stagnate.

The new management has reinvigorated local managers who are now empowered and enthusiastic with clear targets.  Previously owned and operated distribution and production facilities have been closed with both activities now outsourced and the respective freehold properties are either now sold (Australia) or for sale (see below).

3) Cost cutting, asset disposals and a general move to a more ‘asset light’ business model which leverages their very strong Intellectual Property (IP).

There are some particular points to highlight here including:

1. The former CEO and CFO used to take £1.3m between them in remuneration each year!! The new management are on a far more suitable compensation packages.
2. Freehold property disposals.  The Group has recently sold a surplus property in Australia for £2.4m and currently has sites in the UK (1) and US (2) up for sale:

https://chesterscommercial.com/properties/former-haynes-publishing-site-sparkford/

http://chashawkins.com/wp-content/uploads/2017/04/1299-Bridgestone.pdf

http://chashawkins.com/wp-cont...

I anticipate these 3 properties /sites generating one-off income of at least £9m and am expecting an update by management on the progress of these disposals when they report full year results for the financial year ended 31 May 2017.

Investors should note that the Groups various freehold properties are on the books at cost (circa £6m) resulting in some hidden value as by my estimates they are worth circa £13m (50+% of mcap).

Another metric I like to monitor as an investor is ROCE and there is currently room for improvement here as the business transitions itself. Historically, however, the business has had an operating margin and ROCE in the 20’s and I anticipate an improving picture here.

In summary another tick…..

NOTIFIABLE HOLDINGS
As noted above, the Haynes family (including current Directors) have control over circa 50% of the Haynes Group via their ‘A’ class shares and other holdings. Other major shareholders include:

Haynes International Motor Museum – 10.3%

Miton Group – 10.2%

Axa Framlington S.A – 9%

CriSeren Investments Ltd – 3.3%

Directors interests (non-Haynes family members) only account for circa 0.5% of the company which is something I would like to see change over time following Alex Kwarts (CTO) purchase of a maiden 15,000 shares in March 2017.

Recent changes to institutional holdings include CriSeren who increased their holding by 50,000 shares in November 2016.

Given some small caps have only one institutional shareholder, I am happy with the notifiable holdings, particularly Miton.

Although not notifiable, I am also aware of some reputable private shareholder of Haynes stock including Professor Glen Arnold (http://www.glen-arnold-investments.co.uk) who has done some excellent research into Haynes over the years and which can be found in his ‘Deep Value Shares’ newsletters on ADVFN.

Tick…

KKK’s OF CASH!
Cash and short term deposits at FY 2016 stood at £2.55m offset by circa £2m of bank overdrafts. At the January 2017 interims net cash stood at £0.6m; this being a £1.1m year-on-year improvement from the £0.5m of debt at the half year to November 2015. 

So the business has cash (and generates cash) and this is likely to be an improving position as they dispose of their freehold property assets although this may be somewhat offset by necessary further investment in new content, platforms and services development for its professional and consumer product ranges (£3.3m was invested in the six months to Nov 2016 alone).

The Group also holds 1.2m shares in treasury and being debt free gets another tick….

YIELD
The Haynes business has paid a dividend at least as far back as 1994 (9p); this rising to 15.7p by 2011 before being chopped to 7.5p in 2013 where is has remained steady to date.  The 2016 Annual Reports notes the following:

‘The Group is currently in a phase of significant investment including the development of its new consumer digital platforms and the development of new professional databases. The decision taken during the year to outsource group wide production and US distribution will reduce the cost base of the Group going forward and allow the business to invest its cash in the areas which will generate the highest returns. The dividend has been set at a level which reflects current trading, the forward investment plans for the business and the Board’s confidence over the future prospects for the Group’.

The current yield is a very healthy 4.6%,

Tick…

OVERALL SUMMARY

Haynes is clearly a company in transition / turnaround with a lot to prove, however, the very strong brand and contrarian in me can’t help but see the glass as half full rather than half empty. To re-cap:

Positives

• Transition from jaded car manual producer to high tech B2B e-commerce company with in excess of 40,000 business subscribers

• Globally recognised iconic and reputable / valuable brand

• Niche offering and market leader in automotive manuals

• Consumer titles selling well and scoring highly on Amazon

• Strong growth at HaynesPro

• Freehold property assets with hidden value

• Family firm with large shareholding

• Full LSE listing (FTSE fledgling)

• Shareholder friendly management

Negatives

• Historical decline in sales of printed automotive titles yet to be halted across the Group (only UK back in growth territory).

• Impact of electric cars / vehicles yet to be fully determined.

• Potential risk of impact from Brexit on their European operations

• Large pension deficit (net IAS 19 deficit of £21m). The Board notes the increase from £15m at FY 2016 was “driven by a lower UK discount rate assumption on the back of falling UK bond yields”. The issue of the pension deficit was discussed at the last AGM where the Board openly noted it as a concern but manageable. Clearly it’s a significant deficit amounting to 85% of the mcap (or 10 x 2017 PBT) of the company and something to keep a close eye on.  One positive is that the pension deficit is not on the balance sheet of the parent company which is important because the existence of distributable reserves in the parent company determines the ability to pay dividends.

• Dominant family ownership (circa 50%)

I attended the AGM for the first time in 2016 and was warmly welcomed along with a number of other investors and we were pleased to have a detailed Q&A session with the Board after the formal business concluded followed by a sandwich lunch. Management are also very shareholder friendly; the value of which cannot be overlooked.

Haynes is currently a top 5 holding in both my ISA and SIPP having initially bought stock in December 2015 at sub 110p and I have been adding ever since up to current prices. To give some context to the share price / valuation it recently dropped to a low of 99p in May 2016 having previously hit a high of circa 400p during early 2005.

I have a target valuation of circa 240p with a medium term timeframe and am very happy to collect the generous dividend whilst the turnaround takes place.  Whilst a shareholding in HYNS is very unlikely to provide stellar returns (this is not a Fevertree), I am very satisfied to know that my investment is being safely stewarded by the current management, has a high chance of a further rerating and most importantly has a very low chance of delinquency.

Full year results will be announced in September 2017.

I look forward to any feedback / comments from other investors and hopefully to seeing some of you at the AGM in Somerset later this year.

Note ! All errors contained within the above write up, whether formatting, typographical, grammatical or financial (probably all four….) are solely of my own making.