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Small caps
Trevor Hoey

It is less than two years since shares in Hills hit a 12-year low as it braced for the delivery of a statutory net loss of $94.1 million for the year ended June 30. But amid the carnage was a sense of salvation with the appointment of chief executive, Ted Pretty, who forged a strategy to close or sell underperforming non-core businesses with a view to entering more lucrative and resilient markets.
In 2012-13, the company sold or closed its solar, water tank and Bailey ladders businesses, while also divesting its stake in ASX-listed Korvest. But this was only part of the restructuring strategy, with the sale of the company’s Orccon and Fielders signalling the end of Hills history as a diversified manufacturer and distributor, while paving the way for new focused businesses featuring innovation and technology that would deliver improved margins and earnings growth in a far less competitive environment.
These developments were important in strengthening the company’s financial position with the sale of Orrcon and Fielders to BlueScope Steel delivering net cash proceeds of about $80 million. By June 30, 2013, net debt had been reduced from $88.4 million to $4 million, leaving the company well placed to embark on an aggressive acquisition program that saw it make significant headway in terms of gaining exposure to the more lucrative markets Pretty had flagged.


Hills’s strategy, as evidenced by numerous acquisitions which have provided strong positions in resilient growth markets offering robust margins and in some cases, substantial barriers to entry should see the company return to its glory days. But importantly, the company has the firepower to build on an impressive platform. Analysts at Citigroup ran the ruler across the company following Friday’s acquisition of Audio Products Group, a long-established Australian and New Zealand supplier of professional audio products. This development and two previous acquisitions prompted the broker to revise its profit estimates between 2013-14 and 2015-16 inclusive.
Profit forecast

The broker’s 2013-14 profit forecasts were increased by 8 per cent to $30.5 million and factoring in similar increases in 2014-15 and 2015-16, earnings per share are expected to increase from 12.7¢ in 2013-14 to 15.6¢ in 2015-16, representing an increase of 24 per cent.
Based on the broker’s 2014-15 forecasts, Hills is trading on a price-earnings multiple of 12.5 and it also shapes up as a reasonable yield proposition with a share price of $1.70 implying a return of approximately 5 per cent. Citi also took the opportunity to increase its 12-month target price by 12 per cent from $2.10 to $2.35, representing upside of nearly 40 per cent to the company’s recent trading range.
However, Hills may only be in the early stages of its growth trajectory with Citi highlighting the company could spend a further $100 million on acquisitions and still gearing would only be in the vicinity of 20 per cent. Working on an earnings before interest and tax multiple of four, consistent with recent transactions, this could potentially generate an incremental $25 million in earnings, representing around 50 per cent of the broker’s 2014-15 forecasts.
Hills hasn’t just tried to amalgamate numerous bolt-on businesses with a view to boosting profits by achieving top line growth. It has targeted quality companies with proven technologies and leading positions in niche markets.
Furthermore, they have been highly complementary, providing a sturdy and comprehensive platform for expansion particularly across high-growth industries such as health and security. The September 2013 acquisitions of Merlon Health Communications and Queensland-based Hospital Television Rentals (HTR) to a large extent marked the company’s entry into these markets.
Merlon produces electronic systems for the healthcare and aged care industries, providing design, supply, installation and maintenance services to major hospitals and aged care facilities in Australia and New Zealand.Established 40 years ago, it is the second largest in terms of market share. It provides Wi-Fi and traditional nurse call features, and is the leading producer of IP nurse call solutions. HTR is also well-placed in its key markets being Australia’s largest supplier, installer and operator of specialist patient entertainment systems, including televisions and telephones. It provides systems and services to major hospitals and aged care facilities in all states.