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Thanks for the memory

Times change and cars change with them. Cars get cheaper to buy, more reliable and much more difficult for their owners to maintain. In no small measure that difficulty is contrived by manufacturers wanting to bring maintenance and repair revenues in-house. Take that to the extreme and, for example, Bearbull has never actually seen the engine of the Porsche he drives nowadays – the ‘lump’ is only accessible by raising the car on a ramp.

Against that backdrop, Haynes Publishing (HYNS), producer of the eponymous workshop manuals, has seen its revenues stagnate for many years and has been in search of a corporate revitalisation for nearly as long. So it was sad but no great surprise last week when its bosses confirmed what everyone suspected since the company’s founder, John Haynes, died in February – that the company is putting itself up for sale. Indeed, the share price had anticipated this. Since Haynes announced results for 2018-19 in September, the price has almost doubled to its current 434p, valuing the equity at £68m.

True, the share price revival is also due to Haynes’ improving performance, which indicates that the group will have a purpose in the coming years – and hopefully longer – providing data and services to the motor trade. Almost all data is delivered online and includes, for instance, identification, repair and installation information on motor parts in many languages that links to a sales catalogue; diagnostics for vehicles’ electrical systems and something similar for oils and lubricants.

It is unglamorous stuff which has been built up mostly from acquisitions, but it’s where the growth is. In its latest accounts, Haynes breaks down group performance into ‘professional’ and ‘consumer’ categories. This shows that services for the professional side – ie, the motor trade – accounted for just over half the group’s £36m revenues in 2018-19, up from just under half in 2017-18. More important, ‘professional’ produced 86 per cent of group operating profit before unallocated costs. Meanwhile, the consumer division – the print manuals and their online derivatives – eked out just £1.1m of operating profit from £17.2m of revenue. To spell it out, profit margins for the two sides were 36 per cent for professional and 7 per cent for consumer.

Given a combination of corporate revitalisation and the company being in the shop window, are the shares still cheap even though their price is back to levels not seen since the mid 1990s? That’s a tougher proposition to justify. Haynes would have to grow some, then grow some more to warrant a share price of, say, £5, which would offer a margin of safety above the current price.

If recurring trading profits of £8m a year were likely, then the share price could easily be £5. However – depending on how we adjust for the one-off charges that populate Haynes’ income statement – £8m compares with weighted-average trading profits for the past five years of £2.7m, so that’s quite a jump.

Meanwhile, focusing on the group’s cash flow might offer more hope, but it also assumes that the heavy costs Haynes incurs to develop its online services fall away. Ostensibly, Haynes generates oodles of operating cash flow – £12.7m in 2018-19 compared with £4.2m of underlying operating profit. But that does not compare like with like since the group ran up £8.7m of spending on product development. Treat that figure as capital spending by another name – as one should – and the group’s operating cash flow was close to operating profits of £3.8m. That is good conversion of accounting profits into cash, but not in itself enough to justify a higher share price.

For that to happen, development spending needs to fall away, allowing growing services revenues to flood through to profits, as they do in the best IT businesses. That might happen for Haynes, although the portents could be better – heavy spending on developing intangible assets has been a consistent feature in the past six years, averaging £7.1m a year.

For optimists, however, there is the thought that shares in Haynes might be good value compared with similar businesses. Yes, but with whom do you make the comparison? Perhaps with information providers to the trade, albeit in different industries, say GlobalData (DATA) or Centaur Media (CAU); maybe with a web-based business serving the motor trade, such as Auto Trader (AUTO); conceivably with much bigger information providers, such as RELX (REL) or even Experian (EXPN); or with a conventional publisher such as Quarto (QRT). These are all media operators in similar lines, but none make a compelling match.

Nor does Haynes look convincingly cheap compared with these. Latest profits from both GlobalData and Centaur are depressed, so their earnings multiples are artificially high, nullifying a straight comparison with Haynes. Sure, Haynes' shares are lowly rated compared with FTSE 100 players such as RELX and Auto Trader; but, given the performance ratios those produce, why wouldn’t they be?

Granted, a private equity hipster with more spreadsheets than sense might come along with a fancy price, but that’s hardly something to bank on. To buy Haynes' shares now would be to place nostalgia above common sense. The sensible solution may be to sell.