Small Cap Value Report (31 Aug 2016) - HSS, TAP, CHH, GYM

31st Aug '16 by Paul Scott

18 comments 15269 reads

Good morning!

We've had to wave a tearful goodbye to our villa in Paxos - we only booked it for 9 nights, as the cost became too high beyond that.

I've found a spot on a nearby beach, with intermittent WiFi, so hope I'll be able to file this report before the 1pm email deadline.

This evening I'm heading back to Corfu, and am staying there for 3 nights, to round off my holiday. I've booked a little townhouse through Air BnB, which worked out very good value - similar price to a budget hotel room, but for a whole house.

It's the first time I've used Air BnB, partly to see for myself how much it is likely to disrupt the hotels sector. There are so many areas where new internet competition is threatening old, established business models. As an investing theme, it's something we have to be very mindful of - there's money to be made both spotting early the big winners of the future, and avoiding the established businesses which are likely to die out.

I read somewhere that we need to change our mindset, from viewing large companies as unassailable behemoths. Instead they should perhaps be seen as vulnerable, slow-moving giants, that new internet-based competitors are gunning for, slowly chipping away at their market share.

HSS Hire (LON:HSS)

Share price: 78.5p
No. shares: 154.8m
Market cap: £121.5m

Interim results, 27 wks to 2 Jul 2016 - this tool hire company says that the unusual period end has affected cashflow, and worsened net debt. However, debt is still the elephant in the room with this company. It simply has way too much debt, and actually doesn't have any equity at all, once intangibles are written off.

Net debt is a staggering £238.7m. This compares with a hire fleet book value of £142.1m (see note 10 to today's accounts). Therefore the entire hire fleet is financed with bank debt, plus there's another £96.6m debt over & above the debt required to finance the hire fleet. That's a crazy state of affairs. It's the legacy of the former private equity owners, who avoid corporation tax by loading up companies they own with insane amounts of debt. So PE floats are often sold back to the stock market with still far too much debt remaining, as in this case.

It's loss-making too. H1 is a…

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Camtab

31st Aug '16

I let a property through AirBnB and have found it to be an extremely good outlet. I have also rented and to date my experience has only been good. As a landlord I pay about 3% for all my marketing and money handling to be done for me. As a tenant my experience has been it is higher but not punitive and the experience has been much broader than sitting in a hotel room.
Anyway I was writing to see if you had seen the Carclo announcement this morning? Shares down 14% following a reasonably good trading statement which finished with an announcement that the divi is unlikely to be paid as a result of the increasing pensions burden due to falling interest rates.
Best

Trident

I can understand why people want to use AirBnB, especially young people. But it has to be said that compared to comparable commercial establishments it is probably not paying any form of business rates, employing very few people, and maybe in some cases the income tax due on the rent is also not be declared.

So to some extent it is a platform based on some degree of tax avoidance, but not by itself (that we know of), as in the case of Apple etc., but of the people who use it to monitise their own personal assets. I suspect in the case of nearby tenants in apartments etc. are seeing a constant stream of new people with bags etc. So what was once their home building is now being turned into a hotel.

Ramridge

Styles and Wood (LON:STY) issued a note today about a major contract win, £100m over 5 years. It looks to me a major uptick in financials and should lead to a good earnings upgrade.
- although too late for this FY, revenue growth from this deal could be around 15% p.a. for 5 years
- possibly leading to additional eps of 20% at least (IMO)
- forecast pe for FY16 is currently 8.9 . This is before this contract win
- debt was a worry in the past. In the FY2015 report, they state this has now come down to £1.4m from £11.8m

- StockRank 99

SP has gone up some 15% so far. But even at this price it still looks cheap to me The company is clearly on a roll.

All IMO and please DYOR

declaration: went long this morning

danyou

Paul, Given your fondness for small companies with great roll-out potential (Crawshaw or Patesserie Holdings spring to mind), I wonder whether you had a look at The Gym Group (GYM) today.
This has only recently listed but has some wonderful growth figures today, great operational gearing, low overheads, with a very good balance sheet and the potential to be very disruptive in the budget gym market.
Declaration: I bought some today.

Paul Scott

Hi danyou,

I don't share your enthusiasm for GYM (LON:GYM) - have added a section on it above.

Regards, Paul.

FREng

(Off topic, but still interesting I hope). I looked at the share price graphs for ISHARES ? IND-LINKED GILTS UCITS ETF (LON:INXG) and £NG1Q today (the latter is an index-linked bond, the former an IL bond ETF). The effect of the BoE cutting interest rates and continuing QE has been startling, and says rather a lot about the market view on future inflation.

Ben1

Paul, I wondered if you had looked at the interims from Gulf Marine Services Gulf Marine Services (LON:GMS) this morning.
Revenue and adjusted profit are up, but gross profit is down.
Some news in recent days of a new contract, a contract extention but also fairly recently an early combination. So mixed bag, but I guess supporting the oil and gas market is going to be hard going at the moment.

Although the market likes todays results as it is up 8% today

BlueFrew

HSS Hire (LON:HSS) ought to be a good short. But I wouldn't pull the trigger on it while Toscafund are trying to bounce Speedy Hire (LON:SDY) into buying it. If Speedy Hire (LON:SDY) shareholders have any sense they'll have nothing to do with trying to bail out another of Toscafund's dreadful investments.

Trident you might be right I don't know. Certainly well wide of the mark in my experience. The way people earn their money is changing and expectations are many middle class jobs will disappear my main concern is how these jobs will be replaced. To date we have seen zero hour contracts and burgeoning call centres neither of which have in my opinion added anything to the human race. This is also why I am interested in pension fund calls on companies like for example Carclo which I mentioned this morning. This move by the management whilst understandable shows how difficult for investors to get returns on their investments and echos Paul's concerns (see previous notes) re large pension fund deficits.

Cisk

The Carclo (LON:CAR) news today is quite startling because it shows just how much low interest rates are impacting businesses. Someone please correct me if I'm wrong, but it's the first time in the past few years that I've seen a dividend being passed due to a rise in a pension fund deficit, as a result of ultra-low interest rates, rather than as a result of poor trading.

Jim Mellon yesterday (I think) wrote an article lambasting Mark Carney, calling for his sacking and a normalisation of interest rates.

Actually I agree with him on this point re: interest rates. If the economy, 8 years after the GFC, still cannot get back on its feet with base rates at 0.5% (now 0.25%) then nothing will make it so. I actually think, perversely, an increase in interest rates would help the economy.

Have lower interest rates resulted in increased consumer expenditure?

And for property owners who say the cost of mortgages would rise, look what has driven house price growth. One could argue that the cost of servicing a mortgage is less, because of low interest rates, but that doesn't matter if the underlying price of the asset now exceeds any sensible metric; you're paying a lower interest rate to service the cost of borrowing to buy an over-priced asset.

And it would also burst many of the alternative asset price bubbles, e.g. classic cars.

TMFMayn

What is really startling is that CAR's dividend had already been declared and was about to be approved at tomorrow's AGM.

It is one thing for a company to stop paying dividends, but quite another to cancel a previously declared payout. I can only recall that happening on the very odd occasion during deep bear markets.

A quick look at CAR's 2016 annual report shows the profit and loss reserve on the holding company balance sheet was almost £8m -- so it seems (what was) the £23m pension deficit has ballooned by £8m.

CAR says it could not pay the dividend due to legal and accounting restraints, which is true. But when the business made an £9m underlying PBT last year and net debt is £25m and the pension deficit was £23m (and rising), then some might say reducing those liabilities should have been given priority over dividends.

http://www.stockopedia.com/content/norcros-pension...
"The other cause for concern generally are that these pension schemes are simply something to go wrong for your investment."

Wimbledonsprinter

HSS Hire (HSS:LON)'s debt ratios look far too high - net debt/EBITDA is 3.2x. But it is interesting how much they can reduce CAPEX - results say to £40-45 million this year, from £84 million, by my reckoning in 2015. This shows how these hire equipment companies can slow down the Capex pipeline and also should lead to higher utilisation rates and less competition for all players going forward. While most of HSS's business is not competing with Lavendon's powered access business, LVD did mention in its interim conference call that it was seeing stabilisation of pricing in the UK in Q3.

On CAR, with gross pension liabilities of £197 million (Mar 16), it does not take a large fall in corporate bond yields to drive up the liabilities by a significant amount. I see N+1 Singer says that a £20 million impact may be potentially expected.

Camtab

When you think of all the regulation of the Hotel and B&B industry, it is easy to disrupt if you don't take on any of those liabilities, and add nothing to the exchequer. I also expect the HMRC will get wise to it eventually, and add it to the long list of tax avoidance measures it has on file (Oh joy!).

On the pension liabilities it depends on the scale of the national problem as to whether Govt will intervene any further. Most companies have already made changes. However, with Trustees facing personal liability for not following their fiduciary duty - in marginal situations, it must be hard trying to negotiate sensible positions with them.

Hedgecutter

We have a busy holiday cottage, with about 35% of our guests booking through Airbnb. As all payments and fees are recorded and retained on the company's website, I fail to see how paying the appropriate taxes are avoidable without the risk of THE TAXMAN catching up with you in due course. We pay our taxes on our Airbnb income and from income from the other agencies we use. It would be difficult to do otherwise when working with a properly run agency.

Rusty2

Airbnb is an american company? Would our taxman have access to those records?

I have used AirBnB in UK and it's been generally fine, had a few problems in the Far East, doubt I will use there again.

You are thinking from an UK point of view, taxes abroad are a lot different from here, even here though is there not an allowance for letting rooms before you pay tax. Quite a few places I have stayed have only a few guests staying in a year.

Random13

2nd Sep '16

Camtab "unlikely to be paid as a result of the increasing pensions burden due to falling interest rates."

I am always surprised not more is made about this everytime a company talks about funding the pension deficit - the media seems to gloss over the role of interest rates in the liabilities of a pension fund.

Small Cap Value Report (31 Aug 2016) - HSS, TAP, CHH, GYM

HSS Hire (LON:HSS)

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Paul Scott

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