hELPHIRE: a RETURN REVERSAL 'LOSER' WITH GOOD PIOTROSKI SCORE? SEPTEMBER 25 th 2013

The share price of this credit hire company has fallen 95% over five years to 5.6p (market cap of £85m). Profits were non‐existent for four years and it was on the point of insolvency when it eliminated all debt by persuading its banks to accept 187m shares in return for most of the debt in Spring 2013 (they now have 12% of the equity). It also raised £23m in a placing and open offer selling a further 860m shares. This was used to pay off £32m of debt. Even before the transformation of the balance sheet the turnaround was already taking effect. This can be seen by comparing the interim results to 31 Dec 2012 and those to Dec 2011. We’ll use this comparison for a Piotroski analysis (the annual report comparison with its year end at June 2012 and 2011 is terribly out of date and therefore not appropriate):

(1) Profits compared with losses the previous year

(2) Net cash flow from operating activities of £12.1m

(3) Improvement in ROCE year on year

(4) Cash flow is greater than profit

(5) The debt to capital employed ratio improved from 66% to 59% (following share issues and debt for equity swap it is now zero)

(6) The current ratio has improved year on year

(7) There were no equity issues in the half year (but very large issues in Spring 2013)

(8) Trading profit margin has changed from negative to positive

(9) Sales to total assets ratio has improved from 55% to 65%. Thus the Piotroski score is 8.

In the process of repairing the balance sheet the number of shares has risen almost 5‐fold to 1,561m with some dilution for the previous owners and some enrichment of directors with generous incentive schemes.

It seems that business is looking up. A major competitor exited the market in December 2012 and ‘the Group’s trading results through to 31 May 2013 continue to show a considerable improvement over the corresponding period last year’. Debtor days have been further reduced to 127 days (177 in April 2012). Operating profit target for the year is £7.5m, with a dividend target of £2.5m.

Questions:

​1. The regulators are coming down heavily on this industry; in addition to bans on referral fees there is a Competition Commission enquiry into the car insurance industry. Could this result in loss of markets?

2. Will the insurance companies move away from using credit hire firms?