HSS Hire - is it worth buying into the IPO?

THIS IS NOT A TIP. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITES.
Right, as ever, a strange start to a WheelieBlog. I am writing this on Friday Night (23rd Jan) and I had previously produced a Draft of this Text under the impression that HSS Hire did not look all that attractive as a Buy at the IPO. Then a few days ago, things changed because the IPO Market Capitalisation tumbled from £600m to just over £400m at the Top End of the announced Price Range - 210p to 262p. This obviously got me a lot more interested and my intention was to have a Deep Dig into the Numbers and stuff. Anyway, some superb detective work by Aston Girl (@reb40) on Twitter, aided by her CFO Accountant Friend, flagged up that the Company has been Loss Making for several years (this is really down to lots of recurring ‘One-off’ Items !!) and that has put me right off it.

Huge thanks to Aston Girl and her Friend - a great example of how Collaboration can help everyone.

Please note the following ‘Negatives’ that make it unadvisable for me as a Long Term play:

• Using IPO funds to repay Shareholder Loans and not for growth.
  
• Employees taking 40% out and Legacy Shareholders taking out 28.9% - very high, see Part 13 of Prospectus.
  
• HSS Balance Sheet - 42% Assets Intangibles and 20% Debtors and Accrued Contract Income. Ageing also not great.
  
• p.8 of Prospectus has the Exceptional Items.
  
• 2011 Loss £13.6m, 2012 Loss £10.1m, 2013 Profit £0.4m, 9 months of 2014 Loss £5.15m - worse than 2013 so likely Loss To Be Confirmed.
  

There are no Profit Forecasts in the Prospectus. You may be able to find Analyst Forecasts but I have not tripped over any - I have not looked for them. It is not something I want to hold Long Term, so I am not prepared to put too much effort into it !!

BUT………
However, all is not quite that simple. Aston Girl then came up with the idea that what we could do is to ‘Stag’ the IPO - this is where you buy the Stock in the Flotation Offer and then Sell it soon after it has begun trading on the Stockmarket. This could be after Hours, Days, Weeks or even Months - depends on what Happens to some extent - although it is probably best to have a Trading Plan set out beforehand.

It strikes me that HSS is not something to hold Long Term, but there might be a Quick Profit on the Table that can be grabbed. Maybe 20% is possible quite fast. I am thinking about buying on this basis, but I have not made a Final Decision yet - my Broker says I have up until 11.59pm on Monday 2nd February to apply.

I might Plan to use a Stoploss as well. Maybe 10% below the IPO price - or perhaps if it Opens in the market and goes below the IPO price, I will get out fast.

The IPO seems to be getting a lot of Attention and ‘Hype’ in the Financial Press and stuff and all Brokers are pushing it - so there could be quite a bit of Retail Excitement that we can exploit. I saw something funny via a Tweet that a helpful person whizzed round - it had the usual ‘expert’ going on about how HSS was a great investment etc. but the bit that killed me was they said HSS was No.2 in the Industry to Ashstead (AHT) - this is utter Ballderdash as Ashstead is a Plant Rental company - i.e. They rent out Huge Stuff like Diggers, Cranes, Dozers etc. (they probably do smaller stuff but the big stuff is their game I believe), and they are heaving involved in the US (A-Plant?). The true No.1 competitor to HSS is Speedy Hire (SDY).

You can read Prospectus here:
http://www.hsshiregroup.com/wp-content/uploads/2014/12/HSS-Hire-Price-range-prospectus1.pdf

I did find this picture in the Prospectus which I thought was interesting with regard to the wider market and for other stocks like SDY and maybe Lavendon (LVD), VP Hire (VP.) etc., so I thought I would shove it In !!

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MOST OF THE TEXT BELOW IS FROM MY PREVIOUS DRAFT BUT THE VALUATION STUFF HAS BEEN AMENDED. THIS DRAFT HAS NEVER BEEN PUBLISHED BUT SOME OF IT MIGHT NOT MAKE A LOT OF SENSE UNLESS YOU REALISE THE CONTEXT WHEN I WROTE MOST OF IT. I HAVE BEEN FLAT OUT ON MY ‘KEY ELEMENTS’ BLOG AND TO BE HONEST, I DON’T WANT TO SPEND HOURS ON THIS - I AM SURE YOU WILL UNDERSTAND. MUCH OF THIS TEXT IS BASED ON THE EARLIER INTENTION TO IPO DOCUMENT - THE PROSPECTUS MAY BE DIFFERENT. IF THERE ARE ANY SPELLING OR GRAMMATICAL ERRORS - BLAME HSS AND LEAVE ME ALONE !!
For ease and speed I have copied a lot of the Company’s text and hacked it about - so it might read a bit weird in places and there is some Corporate ‘spin‘ in here. The Company’s website has ‘IPO’ and ‘Investors’ pages.

www.hsshiregroup.com

HSS Hire Group, a ‘leading’ provider of tool and equipment hire and related services in the United Kingdom and Ireland is due to IPO sometime in February on the Main List. The announcement was made on 12th January 2015, RNS Number : 8497B.

The Company intends to apply for admission of the Shares to the premium listing segment of the Official List of the Financial Conduct Authority and to begin trading on the main market for listed securities of the London Stock Exchange. The Offer will comprise an offer of Shares to institutional investors and an Intermediaries Offer to facilitate participation by retail investors.

There are 2 key issues at a very high level that you need to be happy with to consider buying into this IPO:

• Are you happy to buy an IPO that is being sold onto the Stockmarket by a Private Equity seller? Many Retail Investors are put off by this straightaway - and often for good reason. In this case, with the Overhang that will ensue after the IPO and the amount of Cash going the way of Selling Shareholders, it is probably wise to be sceptical.
  
• Tool Hire businesses are entirely dependent upon Growth in the Overall UK Economy and the Construction Sector in particular - they are highly Cyclical. If you have doubts about the sustainability of the Recovery, then HSS would probably not be for you.
  

Business Overview
The Directors claim that HSS is the second largest provider of tool and equipment hire and related services in the United Kingdom based on revenues (Speedy Hire SDY is Numero Uno) and the second largest provider of temporary power generation in the United Kingdom based on fleet size. HSS is also the second largest provider of powered access equipment in the United Kingdom based on fleet size. HSS has provided equipment hire services for more than 50 years, primarily focusing on the business to business market.  Alongside traditional equipment hire, the Group offers a range of complementary, value-added services through its HSS OneCall, Reintec, TecServ and HSS Training businesses. The Group also offers specialist rental equipment under its ABird, Apex and UK Platforms brands (more details on these are included at the very bottom of this Blog.)

As of 27 September 2014, HSS operates from over 265 locations, serviced by a delivery fleet of over 400 commercial vehicles and approximately 2,900 colleagues, through a well-established hub and spoke distribution network comprising a national distribution centre, 10 regional distribution centres, 25 local distribution centres and 230 trading locations, that aims to maximise equipment availability on an on-demand or next-day basis.

Key Features

• A leading player in a growing market with attractive structural growth characteristics. The European Rental Association ("ERA") estimates that total UK equipment hire market revenue will grow at a CAGR of 4.3% between 2014 and 2016. HSS is also well-placed to continue to benefit from structural growth resulting from the ongoing drive of larger businesses to outsource non-core activities.  In addition, HSS is targeting the c. 48% market share held by SME independents through the roll-out of its successful Local Format Branch onto trade parks nationwide.
  
• Distinctive and differentiated market position. HSS concentrates on the less cyclical "maintain" and "operate" segments of the tool and equipment hire market, in contrast to providing large plant and heavy machinery geared to construction activities in the "new build" segment. The "maintain" segment refers to customer activities such as refurbishments, improvements and repairs while the "operate" portion of the market includes facilities management, transportation and cleaning, among others.  The Directors believe that HSS's combination of products and services helps to differentiate the Group from its competitors, embed the Group more deeply with its customers and establish a "one-stop-shop" capability that enables HSS to capture a greater share of its customers' potential spending.
  
• HSS has been recognised as a market-leading brand for tool and equipment hire in the United Kingdom.  As of September 2014, the Group had a Net Promoter Score (NPS) of 33 as measured by TNS (based on 591 customer interviews conducted between July and August 2014).  The Directors believe the Group's NPS score is the market leading score amongst major United Kingdom tool and equipment hire providers. 
  
• An integrated and scalable distribution network which centralises all hire stock on a single platform, with the efficient movement of equipment between branches creating a shared inventory that provides the Group with the ability to serve its customers "anytime, anywhere".  This structure helps to maximise equipment availability and increase utilisation of the asset fleet, which is critical to delivering high return on assets. Over the course of 2010-2012, the Group implemented a sophisticated hub-and-spoke distribution network, as a result of which the Group's range of tools and equipment can be made available to its customers at any branch generally within twenty-four hours of a customer placing an order. 
  
• Nationwide branch network with significant growth potential through a roll-out of Local Format Branches in new locations in the UK targeting the c. 48% of the market still held by independents. These branches combine a local presence with access to full HSS customer support and a wider range of tools and equipment for hire with greater availability than the Group's smaller competitors.  As at 27 September 2014, HSS had opened 34 Local Format Branches and the Group plans to roll-out this format to grow its network from over 265 locations to over 500 locations across the UK and Ireland.
  
• Broad customer base that is well-diversified by service offering and end-markets with significant barriers to entry. HSS caters to a long-standing and well-diversified customer base, comprising over 35,000 "live" accounts ranging from large, blue-chip companies to smaller, local businesses across a range of sectors. Over 90% of the Group's revenues in the 52 week period ended 28 December 2013 were generated from B2B customers including many of the UK's largest supermarkets, airports and facilities management companies.  The Directors believe that the Group's focus on the customer experience and relationship, rather than on single contracts, is a significant driver of growth.
  
• HSS has established a capital efficient business model which drives premium returns. The Group has a strong focus on optimising its deployment of capital, only entering market segments where it believes returns are sufficiently attractive. This focus on capital efficiency has enabled the Group to deliver industry-leading returns on assets, which have increased from 21% in the 52 week period ended 31 December 2011 to 26% in the 52 week period ended 27 September 2014.
  
• An experienced Board and long-standing executive team, supported by high quality operational management. HSS's senior management team has strong asset rental and retail credentials and a track record of delivering organic growth, with revenues increasing from £177.0 million for the 52 week period ended 31 December 2011 to £271.6 million for the twelve months ended 27 September 2014.
  

Growth Strategy
The Group's strategy is to build on and leverage its existing leading market position in the UK tool and equipment rental market by:

• Developing and enhancing the HSS hub-and-spoke distribution network to further improve availability to customers and return on assets
  
• Targeting growth in local markets in both the UK and Ireland through a national roll-out of the successful Local Format Branch model, which was first introduced in 2012
  
• Cross-selling its "total equipment management" proposition to mature key account relationships
  
• Continuing to complement and accelerate the Group's growth through selective bolt on acquisitions. 
  

Chris Davies, Chief Executive Officer of HSS, said:

"HSS has outperformed the UK tool and equipment hire market in recent years by offering its customers a powerful combination of safety, value, availability and support, delivered by c. 2,900 well-trained and motivated colleagues with a passion for delivering outstanding service.  By focusing on the more attractive and less cyclical "maintain" and "operate" segments of the market and building a sophisticated distribution network that has enabled a step change in availability and utilisation, we have established a track record of delivering industry leading growth and returns on assets. 

"Having built a well-differentiated market position and a scalable business model underpinned by capital efficiency, we have an exciting opportunity ahead of us as we implement our growth plans.  A public listing will put the business on the best footing to maximise our potential as the recovery in our markets gains momentum, enabling us to scale our model faster and accelerate our growth."

IPO Details

• The offer will comprise (i) an issue of New Shares by the Company and (ii) an offer of Existing Shares by funds managed by Exponent ("Exponent Shareholders"), co-investor Standard Life and certain directors and members of the senior management of the Company and other individuals (together the "Selling Shareholders"). 
  
• The sell-down by the Selling Shareholders will provide such Selling Shareholders with a partial realisation of their investment in the Group. 
  
• In addition, the Company intends to apply the entire primary proceeds of c. £103 million to reduce its current leverage and provide greater capacity for additional capital expenditure to drive future growth in the business, and for the payment of transaction fees; 
  
• Each of the Company, its directors and members of its senior management, Exponent Shareholders, and certain other Selling Shareholders will agree to customary lock-up arrangements in respect of their holdings of Shares for specified periods of time following Admission.
  
• The Exponent Shareholders are expected to remain the Group's largest shareholders following completion of the Offer. 
  

Management Team
The Group's senior management team is led by the Group's chief executive officer, Chris Davies, who has extensive experience in managing multi-site businesses across both the retail and trade sectors, integrating acquisitions and driving growth. The Group's chief operating officer, John Gill, sales and marketing director, Fiona Perrin, and chief financial officer, Steve Trowbridge, all share a similar breadth and depth of industry experience, and together with the Group's chief executive officer have an average tenure at the Group of more than six years.

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Dividends
The Directors intend to adopt a progressive dividend policy, alongside earnings growth, with a medium term target of 3 to 4.5 times normalised earnings cover (being the Group's net income before amortisation and exceptional items, after the deduction of a standard rate of tax as a multiple of aggregate dividends paid for the relevant period).

Numbers
**Note - most of this text is from my first Draft Blog - I have Signposted bits I have changed**
THERE IS A HUGE ISSUE HERE FOR ME. PRETTY MUCH A HUGE RED FLAG. I HAVE LOOKED AT ALL THE FINANCIAL STATEMENTS ON HSS WEBSITE AND THERE IS VIRTUALLY NOTHING REGARDING DEBT LEVELS - A REAL FEELING THEY ARE TRYING TO HIDE IT.

It appears that a Prospectus is still to be issued (this is standard practice before an IPO) and that must contain the Debt information - we need this to do any kind of sensible valuation.

According to an article in the FT, their Debt is £200m which chimes with the issuing in Feb 2014 of £200m of 6.75% Senior Secured Loan Notes with Maturity Aug 2019. They also have a £60m Revolving Credit Facility (presumably with a Bank).

For the 52 week period ended 31 December 2011 to the 12 months ended 27 September 2014, Group revenue grew at a CAGR of 17% and adjusted EBITDA grew at a CAGR of 19%.  HSS's market share in the UK increased from 3.6% to 4.7% over the same period.

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Valuation
Debt
**I have hacked this around since my Initial Draft (not that you saw it anyway !!)**
The Debt is the Elephant (Mammoth?) in the Room here so let’s kick off with that and try and make some sense of it.

Total Liabilities seems to be about £418.7m (page 71 of Prospectus). The Net Assets (Liabilities) seems to be minus £11.8m. However, I am not a great Accountant and this seems way too low to me and if you were to say their Debt was £11.8m it would be silly as in a Fire Sale, the Assets would be flogged off for a pittance.

I read in the FT article that the Debt was around £200m - I think it might actually be higher than this, but let’s use that figure for now.

Apparently £85m of the £103m to be raised from the IPO is to be used to pay down Debt. Therefore, after the IPO, the Debt could be £115m. From the table above in the picture, the EBITDA for end of 2013 was £56.2m. So Debt to EBITDA ratio would be 2.0. I have no idea what this means - is it good or bad?

The Operating Profit for the end of 2013 was £21.4m - so Debt to Operating Profit ratio would be 5.4 times - this looks pretty meaty.

If we try and do a bit of future gazing, and assume the EBITDA for 2014 is something like £65m (there is no science here, just a quick guess !!), then the Debt to EBITDA ratio becomes 1.8.

In a similar way, if we guess at Operating Profit for 2014 as £25m, we get a Debt to Operating Profit ratio of 4.6.

The problem with these sorts of Hire Businesses is that they can command higher debt levels than you would normally accept on other Companies in different industries, where I would normally want a Maximum of Debt being 3 times Profit after Tax. So, the only sensible way to look at this is to try and compare with Speedy Hire (SDY).

I have struggled to find comparable numbers, but probably the best comparison is as follows:

SDY had Net Debt of £84.4m at March 2014 (this is the most up to date figure I can see in the RNS announcements). Operating Profit for Year to End March 2014 was £19.2m (this is before Exceptionals of £4.7m, so £14.5m might be better figure to use).

On this basis, SDY Debt to Operating Profit ratio is 4.4. From the figures higher up, the HSS Debt to Operating Profit ratio for the comparable Year was 6.5. So SDY seems to have more attractive Debt Levels on this simple comparison.

SDY had EBITDA for Year to End March 2014 at £26.4m (Might be worth checking this figure - Accountants might come up with a better number !!). On this basis, SDY Debt to EBITDA ratio is 3.2 times. The comparable figure for HSS from above was 1.8 times - so now HSS looks better than SDY.

This is all very simplistic and not really telling me much.

P/E
The Earnings figures for HSS are paltry - therefore a sensible P/E ratio based on these would be huge. Without Earnings Forecasts, (which actually have some Earnings !!), I have no idea what might happen in future. All a bit useless and just adds to the ‘Uninvestable’ tag.

Risk factors (these are directly copied from the HSS documents)
There are a number of risks that may affect the value of your investment, including, among others, risks relating to:

• Macroeconomic factors in the UK or Ireland
  
• Competition in the Group’s industry
  
• Operation of the Group’s distribution network
  
• Execution and implementation of the Group’s strategy
  
• Collection of amounts owed by customers
  
• Relationships with key suppliers
  
• Outsourcing arrangements
  
• Replacing or refurbishing equipment in the hire fleet
  
• Maintaining customer service levels.
  

Conclusion
There is no way I could invest on the strength of the Information available so far. The biggest Question Marks are around the Debt and Forecast Earnings would be very useful - normally I can find such Forecasts before an IPO so I will be watching out for them.

The IPO Prospectus is vital to understanding these issues but I don’t think they usually contain Earnings Forecasts.

In Terms of the Sector, I would be happy enough here as I think the UK Recovery can continue, although I suspect that the best gains have been had. If I was to buy in the Sector, I would want something that looked Underpriced relative to the other stocks in the Sector, I doubt this will be the case with HSS.

Exponent, the current Private Equity Owners, will remain the largest Shareholder after the IPO - this could create an ‘Overhang’ of Stock that limits upside. It is often the case that these Owners sell out after perhaps a Year and this puts big downward pressure on the Share Price. Exactly this has happened to me on my Infinis (INFI) Shares in recent weeks as Terra Firma have sold out entirely, causing a big drop.

It is worth noting the way Robbie Burns plays IPOs, which he outlines in his Book (Naked Trader 4) in some detail - available via Wheelie‘s Bookshop on WD2. In effect, after analysing a Company and deciding it is an IPO he wants to play part in, he will buy the Stock and if it starts to drop from the off, he will sell and get out. If it goes up he will run with it. This might be a good approach.

Other Details
The Group's core businesses are:

• HSS Hire: The Group provides an extensive range of tools and equipment for hire across approximately 1,600 product lines driven by customer demand. Equipment categories include powered access, lifting and handling, heating, cooling and drying, lighting and power, breaking and drilling and site works.
  
• HSS OneCall: In response to the Group's customers' specific demands, the Group works with a network of more than 300 suppliers to source approximately 2,000 lines of equipment that the Group does not hold as a part of its hire fleet.
  
• HSS Training: The Group's specialist training business is aimed at meeting the training requirements of its customers, offering 240 industry-recognised technical and safety courses at 36 training venues throughout the United Kingdom and Ireland.
  

The Group's primary specialist businesses are:

• ABird and Apex: ABird, acquired in October 2012, is the Group's specialist provider of temporary power generation and distribution equipment and services. The Group further expanded its temporary power operation through the March 2014 acquisition of Apex, a leading Scottish generator hire company. The Directors believe that the Group is now the second largest provider of temporary power generation in the United Kingdom based on fleet size.
  
• UK Platforms: In June 2013 the Group acquired UK Platforms, a specialist powered access business which, combined with the powered access operations of its HSS Hire business, has created the second largest provider of powered access equipment in the United Kingdom based on fleet size as reported by Cranes & Access magazine.
  
• Reintec and TecServ: As an alternative to the traditional hire contract, the Group offers equipment management solutions to the contract cleaning market under the Reintec and TecServ brands. With these services, HSS provides customers with the benefits of management, maintenance, compliance and cost efficiency services and expertise.