Interim results for tool and equipment hire groupHSS Hire (LSE: HSS) pushed down its stock 35% today.
At the end of June, when itspre-close trading updatewas released,I warned you: A few elements suggest you would do well to wait a bit longer before investing in it. Its stock plunged 26% to 134p back then, and ever since itsmarket cap has halved so arethere any signs that this is theright time to secure a bargain deal, snapping up HSS stock at 84p a share?
Lets delve into some of its key financial metrics.
Guidance
Results (were) in line with guidance issued in the pre-close trading update issued 29 June 2015, the group said so why did the shares plummet today?
Soon after HSS warned investors two months ago,market leaderSpeedy Hire whose stock fell almost 4% in early trade today also signalled challenging trading conditions, which impacted its performance in the first half of the year.
As a result,its valuation dropped 30% to its 52-week, multi-year low of 49p on 1 July.Yet investors seem to prefer Speedy over HSS, which is still controlled by Exponent, a private equity house.
Interim Results
On the face of it, HSSshalf-year resultswere not too bad, but they indicate that HSS may struggle to be profitable at the end of the year, and that is a risk youd likely want to avoid because you are paying high multiples for its stock. Operational difficulties area problem for its fast-rising dividends, too.
Check this out:
- Revenues are up 12.1% to 146.4m (H1 14: 130.6m), with organic growth of 10.6%
- Adjusted EBITDA isflat at 28.9m (H1 14: 28.9m), due to plc and new branch start-up costs
- Adjusted EBITA isdown to 4.5m (H1 14: 11.3m) as investment in fleet led to higher depreciation
- Basic and diluted loss per share of 10.51p (H1 14: 19.61p)
- Underlying basic and diluted loss per share of 4.45p (H1 14: 6.03p)
- Interim dividend of 0.57p per share announced, payable in October 2015
The way it looks, Ebitda (earnings before interest,taxes,depreciation and amortisation) might come in significantly lower than the market had expected, and HSSs stock price is adjusting accordingly.
Losses & Covenants
Losses per share are lower year on year, but savvy investors surely have noticed that its net debt was 197.2m at the end of June, down109.2m from 306.4m one year earlier.
The financial covenant in place on the groups revolving credit facility at 27 June 2015 is a minimum Ebitda of 35m on a rolling twelve month basis, HSS says.
Bank covenants set how much debt a borrower can keep on its books depending on certain financial metrics Ebitda, in this instance. So, assuming annualised 2015 Ebitda of 60m which could be lower its implied net leverage would be above 3x.
HSS should be safe on this basis, but I really need to check its next quarters performance before committing to it. I also need more clarity about the exit strategy of its owner,Exponent.
Of course, this is a blow for the arrangers of its IPO.HSSwas listed on the stock market in early 2015, when its shares were priced at the low end of the 210p-262p guidance. Then, its implied market cap was 325m.Now, its equity value is 123m.
Value Is Up For Grabs
Such a drop is not something you will ever experience if you are serious about selecting value companies that boast strong financial and economic moats, such as those that according to our team of analystswill let you sleep at night forever!
Following recent market volatility,their valuations have become even more compelling,butwhether you should buy them or not is entirely your call, so I advise you to do your own reaseach, combining thatknowledge with ourrecommendations, which are included in a report that is completely FREE only for a limited amount of time.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.