Small Cap Value Report (27 Sep) - HHR

27th Sep '13 by Paul Scott

7 comments 10066 reads

Good morning! Fridays are normally quiet for company results, but not today - there are lots to look through. The first one I'm checking out is Helphire (LON:HHR). Regulars will know that this is a favourite of mine, having bought in at 3.5p and explained why here on 20 Jun 2013.

Helphire management pulled off a remarkable turnaround, somehow persuading the Bank to write off a large chunk of the bank debt, plus they have drastically reduced debtor days, and pretty much fixed all the other legacy issues (e.g. surplus properties), and even resumed dividends. I was expecting about £7.5m underlying profit, but they have delivered £8.0m, so these results are good.

With 1.561m shares in issue by the year end, following a Placing, you need to be careful when looking at EPS, because that has been calculated using a weighted average number of shares of 653.8m for basic EPS, and 780.1m for diluted. So you cannot just take the 1.25p basic EPS and say that it's on a PER of 4.5, at 5.6p per share, since that would give a misleading result for the future, given the larger number of shares now in issue.

I cannot find any broker forecasts for the current year, so it's not the easiest share to value at the moment. However, the way I look at it, is that in a turnaround year they made an underlying profit of £8.0m, so there should be upside on that figure going forwards. Also, it is now completely debt-free, including vehicle finance, and paying dividends again, so taking that all into account the market cap of £87m at 5.6p per share doesn't look expensive to me.

Debtor days are at a record low of 126 days, since Helphire now work collaboratively with insurance companies. Indeed I note that their largest shareholder is Aviva. Another dividend has been declared, for 0.11p which goes ex-divi on 9 Oct 2013. The strength of the Bal Sheet is now such that I would expect another special dividend in due course.

There is further upside from the eventual settlement of the Autofocus dispute, where insurers relied on false data on hire pricing rates, and are now liable to pay compensation to companies such as HelpHire. I am not sure of the likely amount there, but it's just icing on the cake, and some of the…

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rmillaree

27th Sep '13

Hmmmmm how long before Quindell come along with a bid for Helphire ? (or perhaps a strategic stakebuilding) - they seem to be snaffling up any other company that they can get their hands on.

Paul Scott

Hi rmillaree,

Arrgghh! That would be my nightmare scenario - can you imagine it? An agreed bid for HHR and we get paid in QPP shares - would be quite funny I suppose, with me ending up with QPP shares by default.

Cheers, Paul.

Ramridge

Hi rmillaree -
Actually that's worth consideration. QPP already provides a range of the supply chain for motor insurers, legal services, repair services, medical services. Have just checked their website and they don't mention car hire services. HHR market cap is circa £90m, well within their radar. Strategically an excellent fit. Mmmm. Worth a punt buying Into HHR methinks.

Marky

This is a high risk share to be in, as summed up by the outlook statement..."The Group continues to operate in a highly competitive marketplace that is currently experiencing exceptional commercial pressures as well as regulatory and political scrutiny and a continued fall in national accident rates."

The company achieved adjusted operating margin of 3.9%, which is low and suggests that any adverse effects indicated in the outlook could push it back into loss.

I note that revenues declined by £20m in the year, and that £17m of this shortfall occurred in H2. If you look at the 6-monthly revenues for the last 2 years, they go:

£112m
£111m
£110m
£95m

The sudden fall in the latest half year was partly due to a reduction in personal injury cases following the ban on referral fees from 1 April 2013. As this only came into effect half way through the period, there could be a further drop in 13/14.

"Hire duration, which is a key driver of the Group's performance, remained stable during the year and an average of 16.4 days was recorded." This KPI is going to come under increasing pressure. Quindell are focused on reducing hire durations - the lower the better for them, as they take a cut of the savings made by the insurance companies. (Hence I see a bid from them extremely unlikely, given the polarised operating models).

Hi Marky -
You make some very good, valid points. Not sure however about "the polarised operating models" though.
Let's take an example, Admiral. Currently Admiral provides Hire Car benefits via an additional premium to the standard cover for a max period of 21 days. The very-clever actuaries at Admiral have no doubt worked out this cost to the consumer based on the co.s past experience, expected future experience and factored in their profit and risk margin, and expected operational costs.
If QPP comes along and proposes that Admiral outsources the Hire Car bit, then Admiral's value proposition is reduced operational costs which would add to the built-in profit margin (assuming that the hire car cost to the customer remains unchanged). QPP's value proposition in turn is to provide hire services to the customer at a cost calculated by Admiral less a share of the profit and risk margins, and operational savings. This is no rocket science and can lead to a win/ win situation, all down to the pricing model being conservative in the first place and sensible negotiations.
Regards, Ram

Calalily

Good synopsis Marky. Looking at the figures and reasoning, I'm struggling to see where near term growth is going to come from.

cig

I have trouble understanding where the "operational savings" can come from. On the one hand you have car hire, a very mature competitive business, and on the other insurers, whose main business is administering claims and they should be as good at that as any other parts of their claim process. What's left for a third guy in between? (esp one that's expected to make superlative profits...)

Small Cap Value Report (27 Sep) - HHR

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