Virtually everybody in the UK has heard of HYNS (Haynes); they publish car and motorcycle repair manuals. It is the kind of share that value investors tend to like. I noticed that Richard Beddard wrote an article about them last month (http://is.gd/eqwF80), which was far more insightful than I would be able to produce. He hadn’t put a value on them, though. Paul Scott also wrote about them last month on Stockopedia (http://is.gd/5tsMvu). He expressed no opinion on its value credentials, but he was downbeat:
The company blames currency translation, and de-stocking by customers, but 18% down seems to me far more serious than that. Hence I wouldn’t be at all surprised for them to issue a profit warning in a few months’ time.
Over the last decade, shares in HYNS have halved in value, whilst the Footise has risen 42%. Its revenues have declined from £36.3 to £29.3m over a decade, and its operating profit has declined from £9.0m to £4.8m. So it’s not surprising that the share price performance has been abysmal.
What is really disturbing is that in 7 of the last 10 years, earnings have actually declined. The number of shares in issue has also doubled. Looking at the numbers quantitavely, it appears that the company is in secular decline. Qualitatively, I don’t know of anyone who is upbeat on the prospects of their products. The median PE of the company over the last 10 years was 9.4, very close to its current valuation. Look at the ROCE figures on Stockopedia: in 2009 they were 15.2%, in 2010 13.8%, then 13.9%, 9.5%, 6.5%, 5.0%.
The trend is down. This is very worrying. You have to ask yourself this: do you think it cyclical, or secular? If you argue the former, then you can make a case for reversion to a mean. If you believe it is secular, then it’s a value trap. Its consistently poor showing over the 10 years suggests, in my mind, that the decline is secular. Without wishing to appear alarmist, the declining ROCE and the whole business about “de-stocking” could suddenly see a sharp drop-off in profits. Gearing levels are low, so I don’t anticipate it having imminent liquidity problems.
But what do I know? The company might accidentally make a profit, or discover a new business line away from car manuals. The dividend is generous, but I’m worried that this will just sucker people into a boring old plodder of a share whose earnings power will bleed away inexerably.
HYNS is the kind of company that I tend not to invest in these days: “the vanilla boring value company”. If it were on a PE of 3, then it might be a different matter. But to my mind, its current valuation is likely to be just the market’s fair appraisal of its low growth prospects (and I would argue negative growth prospects) and business risk.
It’s not a company that interests me. BWTFDIK?
171.5p ASX 3581