Hirepool cruising on a tailwind
Opinion & Analysis
OPINION: As Nana used to say, after a gentle clip round the ear, if you can't say anything nice just keep your mouth shut.
It's sage advice for staying out of trouble, but it does mean silence risks signifying unsaid uncharitable thoughts.
Diplomats to a man, and woman, professional investors are saying little publicly about the float of Hirepool, the latest prospect to head for the NZX.
Perhaps they are trying to avoid having to wash their mouths out with soap. Perhaps not.
These types seldom wax lyrical about a stock lest its vendors stick an extra dollar on the price.
Diplomacy aside, is Hirepool's initial public share offer worth a small investor's consideration? The short answer is yes. The longer answer is that after considering it investors may find it uncompelling.
Hirepool's distinctive orange and blue signage is a familiar sight in urban centres up and down the country. The business has been around a long time - it started out in 1955 - and can point to its track record as evidence it should be around for a long time yet.
A similar business has been listed on the NZX before. Hirequip New Zealand shares were quoted on the NZX for about three years between 2003 and 2006 and it was a direct competitor to Hirepool with a similar business model.
In 2006 Hirequip was acquired by private equity investors for $168 million but fell into receivership in 2012 and was bought by Hirepool in May last year for $90m.
The combined businesses are now being valued at $281m to $339m in the IPO, which is selling 65 to 80 per cent of the company at an indicative price range of $1.10 to $1.50 a share.
The deal is neither a straight sell-down nor a simple capital raising.
About $132m-$136m is to be raised from the issue of new shares and the money used to repay debt - prospective cashflows indicate an expected repayment of $123m in the 2015 year.
The rest of the money raised, about $43m to $125m, will go to the people who are selling most of their shares in Hirepool - Australian private equity investors Next Capital and Macquarie Bank, and Kiwi couple Tenby Powell and Sharon Hunter.
What this means is that effectively none of the money being raised in the IPO is being used to invest in business growth.
In Hirepool's case that's not surprising because this is a mature business and it doesn't need capital to grow, except when it refreshes its big stock of equipment for hire.
That equipment is divided into several groups, the largest of which is mobile plant such as excavators and rollers, which have a current replacement value of $149m and an estimated remaining life of five years.
Although the company is expecting to spend about $27m to $32m on new equipment this year and next, it's possible some significant capital expenditure will be required after that.
While Hirepool is mature, it is not necessarily stable because it tends to do well when the economy does well and vice-versa. This is because its main customers are in the construction industry whose activity tends to go in cycles.
Right now is a good time for Hirepool because the economy is strong and the pipeline for the construction sector indicates growth for the next couple of years at least - 2016 is being touted as a record year for construction.
The tricky bit for investors is figuring out how much of that economic tailwind is already priced in. There are mutterings that the indicative price to earnings ratio - the price per share divided by the earnings per share - looks too high for a business like this.
And an issue in good times is that Hirepool's clients use the equipment so much it makes sense to buy it rather than rent it, so there are limits to the extent Hirepool can ride the boom.
The dividend yield is another number that catches the retail investor's eye. Hirepool says it expects to pay out 55-75 per cent of net profit as dividends. In 2015 its prospective net profit is $25m, which means dividends could be $13.8m-$18.8m.
At the indicative market capitalisation, those figures imply a net yield of 4.9 to 5.5 per cent.
That's fine, but not necessarily exciting to investors who remember double figure numbers bandied about for the Genesis float - that prospectus offered an indicative 2015 net yield of 9.7 to 11.9 per cent.
Perhaps Hirepool will exceed its prospectus forecasts - no doubt investors would hope it does.
There is certainly no shortage of information to pore over in the document, which is good, but it remains regrettably complicated.
Nor will it have helped that the vendors were found by the Inland Revenue to have wrongly claimed $58.6m of tax losses between 2007 and 2012 using the now-notorious mandatory convertible note structure.
In a settlement signed on June 9 all those deductions were disallowed, as were future deductions if Hirepool tried the same thing again.
No wonder the vendors were keen to get the IRD off their backs, because in launching the IPO they are striking while the economic iron is hot. But despite Hirepool's basic qualities they may be asking too much.
Tim Hunter is the deputy editor of the Fairfax Business Bureau.
- Sunday Star Times