Harvey Nash Grp Share Discussion Threads

[edmundshaw] 15/3/2017 17:36

Keevo, What do you think is a fair PER? or EV/EBITDA? or choose another ratio and adjust to suit your preferences on exceptionals, intangibles etc.

The Board expects to report adjusted pre-tax profit for the year ended 31 January 2017 in line with market expectations: Overall gross profit increased by 8% (all the increase down to forex positives). Last year Adjusted earnings per share was 9.73p (9.42p unadjusted).

Dividend is looking a tad over 4p, so 80p would be a 5% yield and a PER of somewhere in the region of 8. Seems a good conservative marker for a target price. Whether that is a fair price I couldn't say, but it must depend on the outlook of course...

[keevo] 15/3/2017 10:22

Good response. What is the general consensus on fair value here. I'm looking at circa 80p with a cushion in projections.

[thorpematt] 15/3/2017 00:12

Keevo,
Intangibles warranted? Now there's a topic! I'd say I'd defer to the FD and the FSA on that one because as our poster above has already discussed it's a necessary evil really. FWIW I personally find it inconsequential (at least here).

Things get tricky when write-downs for amortised acquisitions need to be applied because they can make things look worse than are justified. The flip side of the same coin is that they need to be there because just because an asset is intangible in nature it does not mean it's not still there. I mean for example if you were to buy the Jack Daniels Brand it is worth a lot of money! Why it would be worth less after a few years of owning it makes no sense. (Again as explained above, this IS different for a recruitment business).

WHY I really find it inconsequential, is related to my earlier post on profits, the NT, and valuations based around those principles. Quite simply put, I value these TYPES of business not on NAVs but on the ability to produce real earnings for owners (there being that earlier mentioned similarity between (some) of Graham's writings and those of Mr. Burns.

With respect to your specific rhetorical question on Graham's treatment of "goodwill": Whole chapters were applied and thus summary is tough, but in principle he was synical of most such things BUT the main reasons for being so were related to his desire for a safety margin should things go wrong. In such scenarios ONLY cash would be valued at 100% of reported value. The rest would be on a sliding scale with intangibles at 0%. (All of which is from my memory I hasten to add). So in short even tangible assets are often (usually) NOT worth the value at which they are carried upon a balance sheet.

What I should also add is that Graham's main principle was to buy companies REALLY cheaply. I don't look for that per se. Buffet of course took those principles and adapted them to find "great companies at a fair price". And it's really more as a analysis tool that Graham's principles help me to be synical and in determining fair values for companies in today's market.

I do think recruiters have reasons why they should trade on modest PERs:-
Lack of large barriers to entry.
Key personnel issues (as per above again).
Cylicality
etc.
etc.

but among all of that, the truth is that companies that produces tidy returns to shareholders, growth and genuine profits do all warrant strong valuations...regardless of NAVs.

[dangersimpson2] 14/3/2017 13:01

thanks. Yeah I'm @DangerCapital

[keevo] 14/3/2017 11:27

Very good response. As HVN revenue is increasing from around Europe the drop in Sterling v Euro can only be a good thing also. I see HYDG as low risk with a good dividend yield. Are you on twitter?

[dangersimpson2] 14/3/2017 10:49

Personally I ignore all goodwill in all valuations of all companies. It is simply an accounting entry to account for the premium paid over net assets on takeover. Acquisitive companies will typically have more goodwill.

While having a low PTBV like HYDG may provide a better downside protection in extremis unless it is in cash or property then the assets tend be be hard to collect in a wind up situation. I'm not sure it is good metric for valuing recruiters as a going concern where most of the value is in the brand and economies of scale. They typically require very little capital to operate since their assets are their people.

The benefit of this asset-lite model is typically high ROCE so if successful they can grow rapidly with little capital expenditure. The downside is that the 'assets' demand a high proportion of the economic value they generate or they go elsewhere. This is one of the reasons that profits at HVN have been relatively static even as revenue has grown. They are priced for a significant permanent decline in earnings and their balanced business model of permanent, contracting & outsourcing has always proved quite resilient. For HVN to be a successful investment they don't need growth just a lack of significant decline.

For HYDG having a large amount of capital tied up in working capital is not necessarily a good thing - their low ROCE means they will suck in cash even as they grow earnings and probably face the same problems as other recruiters of staff retention. If they can operate on a lower NWC and generate growth then turning this working capital into cash and increasing earnings will make this a good investment too.

[keevo] 14/3/2017 09:38

Thanks for the reply. How much is the goodwill on HVN's balance sheet? Do you believe that is warranted. Seems a tad unrealistic but just my opinion. 49.7 million? Did Mr. Graham value with goodwill, I dont think so.

I'm invested in HVN btw. 80p is attainable short term I believe and nice dividend. Not convinced on anything beyond especially if there is a downturn.

[dangersimpson2] 13/3/2017 15:19

Based on their trading statements for the next reporting period:

HYDG.L expect to report a PBT of £0.75m so are on an EV/PBT of c.10.

HVN.L expect to be in line market expectations of 8.3p EPS = £6m PAT = c£7.5m PBT vs EV £55m = £61m mkt cap - £5.5m net cash so are on a EV/PBT of c.7.

Very simplistic metrics but on the surface it seems less than obvious that HYDG.L should be considered better value.

[thorpematt] 13/3/2017 12:46

Keevo,
Thanks, I have had a look at these.

I personally have a few problems with it. Firstly it's a little too small for the portfolio rules; but in terms a valuation Mr. Graham warned me about inconsistentcy of earnings. Although he also advised against judging the future against the past it is important to understand a trend.

Upon my previous commentary of measuring value against profitablility I still have the issue of even finding normalised EPS to give a measure of underlying profits.

HVN have a course been utilising the normalised section for some time to describe their underlying profits as opposed to the headline ones. I am just about OK for this if there is a viable story. (My notes on the last sect of accounts called it a binary bet on whether management had a hold or not)....my last such bet was greggs BTW.

Hard for me to give a fair value for Hydrogen. Do you have an expectation of future profits? I note some postive momentum of late which perhaps aaugers well. However small stocks such as these can move either way quickly as I suspect you are well aware.

[keevo] 13/3/2017 10:44

compare to HYDG.L . They are a much better value pick

[thorpematt] 10/3/2017 21:12

A nice breakout on the chart I have to say.

There are LOTS of ways to value a PLC. I ordinarily utilise Ben Graham's methods and whilst I would not say I implement every idea from his book "security analysis" (War and peace is an easier read) I have to say I still find his writings remarkably relevant still.

Robbie Burns tends to utilise some very effective but simple methods for valuations which (in many respects not disimilar to Mr Graham) make very good sense when you think about it.

"How much are your profits and how much does your company cost to buy?" is kindof the gist. His analogy is to consider if you were to buy the whole company would you be happy with how long it took you to make your investment back.

On that basis we're extremly cheap here. On Mr. Graham's method we have a tidy margin of safety with a valuation of circa 40% lower than fair value. (by my calcs).

We could compare others if you wish? Any in particular?

[edmundshaw] 10/3/2017 18:33

In what way not as good?

[phillis] 10/3/2017 18:27

they are cheap because they are not as good
simple

[edmundshaw] 09/3/2017 18:00

Thanks gleach. His logic is very reasonable...

[gleach23] 09/3/2017 16:04

Good news - as I half suspected Naked Trader just announced he has bought in - this would explain the early afternoon buying as he emails some of his Telecom Plus recruits earlier than he updates his website.

"I bought some of recruiter Harvey Nash (HVN) At the seminar we saw lots of recruiters on the rise and compared them all.

Harvey Nash easily came out the cheapest rating and so I bought those though Staffline and RWA looked good too.

I don't see why HVN shouldn't have at least another ten percent in it and indeed if it was rated anywhere near its peers it would be 20% higher."

[gleach23] 09/3/2017 15:22

some decent buying coming in now - will hopefully see a pop back up to 70p if it continues

[ntv] 09/3/2017 11:43

heading back to 60p so some more large chunks can be moved about?

[mongrels3] 08/3/2017 08:16

abcurtis, that is indeed an interesting change in holding. Especially as DBAY has gone from 0% to nearly 12% in one hit.

I hadn't previously heard of DBAY advisors so thank you for the tip off re Creston. Having had a quick sniff round DBAYS website and looking at some of their other investments, it has value investors written all over it.

Without doubt an interesting development!!

[coolen] 07/3/2017 21:40

NTV, I believe there is an exemption for certain types of institutions whereby at under 5% they need not disclose their aggregate holdings.

[abcurtis] 07/3/2017 21:21

Crest on was the other company, just remembered

[abcurtis] 07/3/2017 21:20

DBAY advisors now have 11.84%That's good news and bad. DBAY bought out another of my holdings a few months back. Good news was they bought out the company, the bad news was the premium was not much. In that instance I believe DBAY had been a long term shareholder before buying it out. My take on this is that the writing is on the wall

[ntv] 07/3/2017 19:26

standard life holding form incorrect?
doesn't appear to show new holding

[ntv] 07/3/2017 18:15

RNS out for new major shareholding
hopefully they will encourage a break up of the group

[phillis] 07/3/2017 17:32

gross profit down 1% in constant currency
Says it all really
Improvement nothing to do with management

[dangersimpson2] 07/3/2017 15:11

I'm not sure your memory is correct on that one THORPEMATT. The last set of accounts were the HY results and they had little in the way of adjustments that signal that management are seeking to hide the underlying performance of the business.

The usual games companies play are things like:

- removing all acquisition costs but including the profits from the acquisition
- removing restructuring costs but in state of continual restructuring
- capitilising development costs
- 'kitchen-sinking' i.e. taking provisions through the income statement to the balance sheet, adjusting them out as non-cash in the short term yet keeping quiet when the cash impact hits later.
- sales that end up permanently in trade receivables not cash

I don't see any of these so from this point of view these were the cleanest set of accounts for sometime. Essentially I think the weakness was due to poor business performance in the first half with regard to costs combined with the usual concern over working capital outflow. Every HY the market seems to worry about the cash outflow of the business to see it all come back in at the FY.

The other reason I think the poor recent performance is nothing to do with concerns with the accounts is the recent good performance of companies like Dialight, Serco & PureCircle shows that the market is currently ignoring even pretty obvious red flags. It seems it needs a bear market before people realise which companies are swimming naked!

Anyway agree there is value here as the business seems to be doing mostly ok yet is priced for severe declines.