Just had a good read of the corporate presentation and have to say I am on the fence.
Key Points for me are:
1) They are heavily hinting that further acquisitions are on the way.. Further dilution at these price levels, no thanks.. The company share price is back to where it was near the start. They need to show some of this value and let the share price appreciate before going on more buying spree's.
2) Whilst the individual businesses seem to be producing good EBITDA, the overall quarterly's don't show this on the bottom line. This has to equate to a combination of the Overhead Corporate costs (circa 1.5M according the to the presentation) and investments. (They mention heavy investment in equipment and technology). Whilst I know this has to be down, I have also seen (and invested in) companies that constantly have these investments every quarter and we therefore never see these business line profits hit the underlying bottom line.
3) The Corporate costs are a chicken egg thing. You have a minimum corporate cost to cover a business like this but you try to grow to make this a smaller percentage of your overall costs and thus dilute the effects on the bottom line. If growth is predominately through acquisitions, this will lead to diluted equity and our shareprice will continue to be held back.
4) There words around organic growth opportunities worried me. Basically it seems that organically growing the business is limited and thus an consolidation by acquisition strategy is what is being pursued.. I am not sure what P/E they are paying but this is a tough strategy if significant cost savings/value drivers (multipliers) are not found. I would consider this personally a high risk strategy.
5) The whole synergies and cost savings are brushed over very lightly.. Almost like they had to say something.. Cost savings and synergies are tough if each acquisition is bringing a new physical footprint and synergising along technology and processes usually has an upfront cost and the benefits may take some time. Cultural synergies are nice for the brand but bring very little to the bottom line.
6) The acquisition of Morrison Geotechnic is a good example. a NEW service line and NEW footprints.. Synergies along "invest in technology to support field staff real-time data collection and sample registration.". This means spending money and a longer term return.. What are the cost saving synergies here to further increase the EBIT? What are the multiplying affect of having this acquisition (is their a cross selling opportunity?)
I like the sector and the possible opportunity here but not convinced by the strategy as it seems to be a basic consolidation play. Which would be okay if the shareprice was not way down here where acquisitions cause huge dilution.
At the moment if I do a basic calc. 19.9M Market Cap.. Earnings (0.7 Octief, 1.5 Precise, 1.4 Morrison, -1.5 Corporate, Total 2.1M), then EV/E is approx 9.5. With Peers (according to last sheet) running around 12. Which in my mind shows we are not far from the peers. The 10c shareprice was about right.
But I strongly believe HRL can do a lot better both on the earning's side and finding more synergies to reduce the costs and I do believe they can organically grow. I also strongly believe in the team driving this so this is why I continue to hold. But if we see another round of big dilutions due to acquisitions then I need to re-evaluate.
Be interested in other's opinions here.
Do Your Own Research. My opinions only and not investment advice.
HRL Price at posting:
8.4¢ Sentiment: Hold Disclosure: Held
