Its been offloading machinery and properties earlier this year to help pay down debt and now currently in the process of divesting itself of Allied one of the COA 'bolt ons' and have also dumped Rentair UK onshore equipment hire to Speedy Hire PLC.
Sale of Coates Hire Onshore equipment hire business
Minter Ellison Lawyers acted for Coates Hire Limited's UK subsidiary, Rentair Limited, on the sale of its UK onshore equipment hire business to Speedy Hire PLC. Coates Hire is Australia's largest equipment hire company supplying to various industries.
The firm's London office acted on all aspects of the sale of the business, including assisting with due diligence enquiries, preparing the business for sale, negotiating sale terms and documentation, attending to exchange of contracts and completion and dealing with all post-completion aspects of the sale of the business
Found this past review 12/10/04 on the web interesting read. DYOR!
Disrobing Coates Hire 12 Oct 04 | Issue 162
Disrobing Coates Hire
"Nearly everyone loves a boom-time stock. Here we explain why we want no part of it...."
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Nearly everyone loves a boom-time stock. Here we explain why we want no part of it. COATES HIRE (COA) Recommendation: SELL SECOND LINE INDUSTRIAL Price at review: $4.60 Most recent price: $6.58 Change since review: +43.04% Fundamental Risk:
We’re going to start this review with a quote from Charlie Munger—it’s a long one but worth the effort: ‘One of Berkshire’s non-secrets has been that we really love companies that have all their earnings at the end of the year in cash when sales are static. I had a friend in the construction equipment business years ago. That’s a very tough business—big inventories and big receivables. And he told me, “No matter how well I run this business, at the end of the year all my profit is sitting in the yard.” There was never any cash—just more used machines in the yard. Generally, we hate that kind of business. We’d like a business that is spewing out a lot of cash.’
That’s a quote that rings in our ears every time we review a tough, capital-intensive business like Coates Hire. While it’s currently experiencing something of a purple patch and the near-relentless share price rise has made our repeated warnings look foolish, we stand firm: Coates is no ASX or Macquarie Bank—and easily qualifies for this issue’s Warning Bell.
So what might Munger think of Coates? Over the last eight years, it has recorded total profits of $166m, boosted significantly by the $46.8m profit it recorded last financial year. Over that same period, the company’s investment in plant, property and equipment (mostly equipment for hire) as shown on the balance sheet has grown by about $350m.
Even ignoring the debilitating effects of depreciation on that ‘investment’, Coates has had to find at least $350m to invest in new equipment whilst recording a combined profit of just $166m. So not only are all of the profits tied up ‘in the yard’, but the group has had to find a further couple of hundred million dollars. It’s like the salesman on $30,000 a year that spends $80,000 on a new car every second year. Add in a few hundred million more for acquisitions and you can see how Coates soaks up far more cash than it produces.
That cash has come from two sources: borrowings and newly-issued shares. Over the past eight years, borrowings have increased by more than $100m while shares on issue have tripled to 205m. Good businesses don’t tend to need to triple their equity base over an eight-year period. Even ignoring the acquisitions, it seems shareholders have sent a lot more cash to Coates, in the form of new share issues, than Coates has sent back in dividends the last eight years. Munger wouldn’t be impressed.
Over the long run, this makes Coates a likely poor performer. Had you purchased Coates shares in mid-1997 at $3.70 and held until today, you’d have eked out a meagre return of roughly 6% per year versus nearly 9% for the All Ordinaries Accumulation Index. And that ignores the heartache of watching your investment plummet by about 75% by mid-2001. It’s taken a very significant boom to get that investment back into positive territory.
Yes, Coates’ business is going great guns right now. But a quick glance at the historic earnings in the annual report is conclusive proof that this is a cyclical business, with earnings per share over the last eight years ranging from 1.1 cents to 23.1 cents, the high tide mark set this year. In One up on Wall Street Peter Lynch says: ‘Cyclicals are the most misunderstood of all types of stocks. It is here the unwary stockpicker is most easily parted from his money, and in stocks he considers safe.’ Everyone seems to have forgotten that cyclicals like Coates also go down. In five years’ time, it wouldn’t shock us to see the company’s earnings down 90% and the stock price down very significantly.
If a wealthy businessman came into our office and offered us a similar business, with $300m of net tangible assets (NTA), for $300m, or one times NTA, we’d send him packing (even if we were rolling in money). We’d tell him that equipment hire is a tough, cyclical business and we’d only consider buying it at a decent discount to NTA. With Coates trading at $4.60, or 2.8 times its NTA of $1.64, you can see why we believe this stock is very overpriced right now. We doubt it will remain so indefinitely. The shares are up 40% since issue 145/Feb 04 (Sell—$3.29) and we strongly urge those holding this stock to SELL.
NHR Price at posting:
$2.10 Sentiment: None Disclosure: Not Held
