Market Commentary - Housing, Infrastructure, Construction and Services
The main reason to watch the markets at this time of the year is because a few curve balls are often thrown at investors. The news this morning that HSS Hire has conditionally placed 15.4m shares at 83.9p to raise around £13m is such an item. It’s going to be a long haul for HSS. The moves yesterday and for much of the Xmas period tell us little about likely future changes
The main reason to watch the markets at this time of the year is because a few curve balls are often thrown at investors. The news this morning that HSS Hire has conditionally placed 15.4m shares at 83.9p to raise around £13m is such an item. The company has a PE type funding structure with equity at close last night of £123m and net debt in early July of £239m. The optimism expressed about debt reduction at the interims in late August faded by the November update and became a promise that a small reduction might be achieved. Trading in 2H seems to have been less buoyant than hoped in August and the company is engaged in a costly restructure programme so a bit of cash seems to have been needed. The new shares have been bought by Exponent which owned 50.4% before the new issue and Toscafund which previously owned 23.0%. The dash for growth promised at the time of the float has failed to materialise and while growing the business to reduce debt remains the main strategy there appears to have been a short term cash “mini-crunch” that has given the main backers few options. The new stock has been raised without a discount to the closing price last night which is probably no surprise.
It’s going to be a long haul for HSS. The market has altered as the type of equipment it hires is more affordable. Observers can do their own sums of course but, for example, a hedge trimmer that costs £535 to buy can be hired, one-off, for £115 a week. That’s good business for the hirer of course, if the equipment is let out but makes the hire or buy decision for a frequent or professional user of such equipment quite easy. Hence others in the hire sector have veered towards more technical equipment. The two main shareholders have backed management at this stage and it may be the range of options for them was not large. If HSS gets the market right then the equity uplift is substantial. But it will take time and its flexibility levels are low as the branch expansion in recent years has left it with a lot of medium duration property leases and supply agreements with organisations such as Amey are at highly competitive price levels.
The read across from HSS to rivals is not particularly meaningful in our view. Gaps in terms of product range and the segments of the market its serves are opening. The only sense in which there may be some read across is that HSS seems not have made meaningful inroads in terms of market share.
The moves yesterday and for much of the Xmas period tell us little about likely future changes. There was limited movement in the sector yesterday with Polypipe the best riser , up 1.4%, regaining some of the previous day’s losses and G4S down 2.1% at 229.2p. The latter has drifted slowly down from a close at 251p in early November as support has fallen for no obvious reason, except perhaps the lack of more news on disposals and the consequent impact on net debt, which remains a tad too high. Our sense is that the company sees 2017 as the year when it can start to benefit more fully from some of the work done in the last four years to improve performance and that 300p is a realistic target for the mid term. The Xmas period does create some opportunities and at 230p G4S is one though trading in size at that level right now will present its own difficulties!
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.