Speedy Hire Presentation, Burford Analysis and Treatt Trading Statement

On Tuesday the 1st October I attended a company seminar organised by ShareSoc in Birmingham, mainly to present my new book. But there was an interesting presentation given there by Speedy Hire (SDY). This is not a company I have looked at before because it seemed to be in a sector driven by construction activity which tends to be cyclical and in a fragmented market with few barriers to entry. This is probably why other listed companies in the sector such as HSS and VP are on low valuations (typically P/Es of less than 10). Speedy Hire is on a prospective P/E of 9.5 and a dividend yield of 4.2% according to Stockopedia.

So why was the company interesting? Firstly Speedy Hire seems to be somewhat of a turnaround situation from dire 2016 results. The presenter, Chris Morgan, explained how the company has a new focus on improving the proportion of services in the revenue mix which have better margins and there is a new focus on SME customers which they consider a significant opportunity. They are also undertaking a “digital transformation” to reduce costs and improve service. That includes a new “app” that enables customers to order items whereas most orders are taken over the phone at present. This is currently in essence a very labour intensive business – for example they have over 50 people on credit control alone.

There are clearly opportunities to improve efficiencies in the business by investing in technology which small local hire companies would be unable to match. There is also a focus on improving the return on capital employed (ROCE) which I always like to see – it’s now about 12.8% excluding the recent Lifterz acquisition so is moving in the right direction. On the 3rd October the company issued a positive trading statement with revenue up 6% and higher growth in the sectors focused upon mentioned above.

In summary a company that may be worth a closer look as management seem to be improving the business substantially.

After the Speedy Hire presentation I covered my book “Business Perspective Investing” (see https://www.roliscon.com/business-perspective-investing.html ) which explains the important things that you should look at when choosing companies in which to invest. It suggests ignoring the typical approach of looking for “cheap” shares based on low P/Es and high dividend yields but focusing on the business model and other attributes.

As Burford Capital (BUR) is a company in the news after the shorting attack by Muddy Waters, I chose to run through why I would never have invested in the company based on the check lists given in the book. In essence it fails too many of them, no doubt to the consternation of some in the audience who held the stock. Here are just some of the problems:

  1. High barriers to entry? None I am aware of – I suspect anyone could set up a litigation funding company given enough capital.
  2. Economies of scale? I doubt there are any as legal claims are labour intensive.
  3. Differentiated product/service? I am not clear that they differ much from other litigation funding businesses.
  4. Low capital required? Absolutely the contrary as they have to fund legal cases for years at enormous cost before they get any payback.
  5. Proprietary technology or IP? There is none.
  6. Smaller transactions? The opposite. Burford’s profits depend on a few large legal cases.
  7. Repeat business? I question whether there is any. Legal cases tend to be one-offs.
  8. Short term contracts? The opposite. The cases they take on can run for years.
  9. No major business risks obvious? Significant risks of losing major cases.
  10. Low debt? The contrary as they use debt to finance their legal cases.
  11. Appropriate corporate structure? Odd to say the least until recently with the CFO being the wife of the CEO and no executive directors on the board.
  12. UK or US domicile? No they are registered in Guernsey.
  13. Adhere to UK Corporate Governance Code? No.
  14. AGMs at convenient time and place? No, they are in Guernsey.
  15. No big legal disputes? Apart from participating in the legal actions they fund, they also have received a claim from their founder and former Chairman recently.
  16. Accounts prudent and consistent? Is recognition of the value of current legal claims prudent (upon which the reported profits rely) and the accounts conservative? It’s very difficult to determine from the published information but I have serious doubts about them.
  17. Do profits turn into cash? Not in the short term. They are effectively recognising what they consider to be the likely chance of success in current profits. But winning legal claims is always in essence uncertain. I have been involved in several big cases and your lawyer always tells you that you have a very good chance of winning as they wish to collect their fees, but even if you win collecting any award can be uncertain.

I could go on further but the above negatives are sufficient to rule it out as a “high quality” business so far as I am concerned. That’s ignoring the allegations of Muddy Waters and the counter allegations by Burford of share price manipulation (i.e. market abuse).

Treatt (TET) issued a trading statement today (4th October). This is a company that specialises in natural ingredients for the flavour and fragrance markets, particularly in the beverage sector. I hold a few shares in it.

The statement says that there has been “a significant fall in certain key citrus raw material prices…..”. This is impacting revenue growth although they have been diversifying into other product areas. Profit before tax and exceptional items is still expected to be in line with expectations – which was for a fall in EPS for 2019 based on consensus broker forecasts.

Now when a company says its input prices are coming down by more than 50% as in this case, you would expect the company to be making bumper profits as a result. But clearly this is not so. It would seem that their customers expect to pay less which suggests this is a “commodity price” driven business where competitors track the prices of the raw material downwards.

This might be a well-managed business in a growth sector for natural ingredients but there may well be low barriers to entry and an undifferentiated product in essence. So it may well fail the checklists in my book.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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