Feature – Rental Management – Speedy Hire and HSS

As President John F Kennedy said in 1963, “A rising tide lifts all boats.”

HSS Hire Group floated on the London Stock Exchange in February. How did this go, and what happened to HSS and Speedy’s share prices recently? What do these movements mean for the rest of the industry?

It has been many years since a UK or US rental company has floated on the stock exchange.

HSS’s target share price for its flotation was between 210p (€2.87) and 262p (€3.59). The achieved price of 210p raised £104m (€142m), and was equivalent to an acceptable but not great EBITDA multiple of 6.75.

If it had reached 262p, the price would have been 7.88 times EBITDA, reminiscent of pre-2008 valuations. All the proceeds of the flotation went to the previous investor, Exponent Private Equity, rather than to the company.

HSS is a respected company but it operates in a very competitive crowded, though growing, UK market, and still has a post-recession balance sheet capital deficit. In 2014, it made a small loss rather than a profit.

When US renter Neff went to the market in November 2014, the share price target was US$ 20 (€17), but US$15 (€12.7) was achieved.

This was a multiple of 6.66, which was similar to HSS. If the target price had been achieved, this would have been more than 8 times EBITDA.

There should be a valuation premium for publicly traded companies, due to the ability to buy, and especially sell, shares on short notice.

One rule of thumb is this premium was 30%, but how does this work post-2008 crisis? Let’s look at the share price movements since flotation of HSS, Speedy and Neff.

Oil prices

Since its IPO, Neff’s share price declined 33% from $15 (€12.7) to $10 (€8.4) on 17 July, following the drop in the oil price. First quarter 2015 revenue and EBITDA were actually up slightly on last year, but the markets seem to have ignored this good news.

Comparisons between HSS and Speedy are interesting as they are both strong performers in the UK. They are both traded on the same stock exchange in London, and both have revenues around €400 million, while the third biggest tool hire company is a distant 80 million. But the market is fragmented, with Speedy controlling less than 20% of the £2 billion-plus (€2.74 billion) UK small tool and equipment rental market.

Speedy’s shares have been traded on the London Stock Exchange since the 1990s.

The price rose from 75p (€1.08) in 2002 to reach 350p (€5.03) in 2007, or five times growth in five years, but then crashed down to 20p (€0.29) in 2009 - a drop of 94%.

The stock market falls in and out of love with equipment rental very quickly.

In the case of HSS, the announcement that caused a disappointment in July 2015 was that earnings would be the same as the previous year. This announcement came after a flotation prospectus full of optimism.

The total decline in share price was from 210p on flotation in February, to 133p (€1.91) on 17 July, which was 37% lower. The decrease in HSS market capitalisation was from £329 million (€472 million) down to £210 million (€302 million), a drop of almost £120 million (€172 million). This is a big sum to HSS. It’s larger than the company’s previous two years total capital expenditure.

Accounting scandal

Speedy had a more complicated story. After the accounting scandal reported in late 2013 that resulted in the resignation of chief executive Steve Corcoran, the share price dropped from 64p (€0.92) to 50p (€0.72) – a fall of 22% - but rebounded to reach over 80p (€1.15) soon afterwards.

In May 2015, Speedy told investors that it was putting things right, its network optimisation program and new IT system were completed ahead of schedule, and it had introduced a “radically enhanced sales and marketing function in place to grow core hire”.

But a few weeks later, in July, the message was “a lack of available equipment during the network optimisation programme, focus on strategic accounts at the expense of SME (small and medium-sized enterprise) customers, and poor customer service during implementation of the IT…system”. This meant results would be worse than forecast and worse than the previous year. After chief executive officer Mark Rogerson stepped down, the share price dropped from its 80p peak. By 17 July it was 53p (€0.76), a decrease of 34%.This second disappointment had a similar effect on the share price to theevents of November 2013.

In conclusion, despite these rollercoaster movements, both HSS and Speedy operate in a healthy growing UK market with significant infrastructure spending and construction forecast growth. Lavendon and VP Plc’s share prices did not suffer this year. While the HSS flotation was at the bottom of its price ambition, it was a success, as was Neff’s IPO in the USA.

The stock market investment is good for the rental industry, and we can expect to see more IPOs perhaps in different countries, but the share pricing will probably be moderately low.

These examples of bad news for each company resulted in significant share price declines. The stock markets still have money for the rental industry but the markets are still easy to shock, and will be for some time.

Jeff Eisenberg has spent 18 years in the equipment and rental industry. He started and led Genie Financial Services in Europe, providing finance for large and small rental companies all over the world. Since 2000 he has held senior positions in a number of European rental companies, as well as working with start ups and acquisitions. He now provides consulting services to financial institutions, equipment manufacturers, and rental companies.

You can contact Jeff on tel: +44 7900 916933 or email jeff@claremont-consulting.com