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Small is mighty for Speedy Hire

As SMEs underpin growth in equipment hire, the group is expanding into capital-light services
October 3, 2019

Speedy Hire (SDY) has come a long way since the dark days of 2015 that saw two profit warnings in quick succession and the shares plunge to as low as 28.5p. As the recovery in equipment hire continues, the group is building resilience by diversifying into capital-light training and testing services.

IC TIP: Buy at 50.6p
Tip style
Value
Risk rating
High
Timescale
Medium Term
Bull points

Ongoing recovery

SME opportunity

Services expansion

Bear points

Construction slowdown

Net debt

Investment in predictive analytics and artificial intelligence has improved capital allocation at Speedy Hire over recent years, ensuring that the right equipment is distributed across the depot network. Reducing the number of product lines by over a third had driven up the utilisation rate to 56.8 per cent on a rolling 12-month basis as at 30 June, compared with 44.5 per cent in its 2016 financial year.

With redundancies and restructuring of the depot network to shrink the cost base, return on capital employed (ROCE), excluding amortisation, rose to 12.8 per cent in 2019, which strides ahead of the 3.2 per cent seen three years ago. Importantly, it is above the weighted average cost of capital of 10.1 per cent – the level of return beyond which investments should create value for shareholders.

Spending £54m on new hire equipment, the average age of the fleet has fallen from 3.8 years to 3.3 years. Together with £31m spent on acquisitions as the group expands further into ‘powered access’, net debt rose £20m last year to £89.4m. With lower capital expenditure anticipated, Liberum expects net debt to fall to £80m by the end of March 2020 (excluding lease liabilities), less than one times forecast cash profits (Ebitda).

As one of Speedy’s largest customers, Carillion’s collapse hurt and it triggered a shift towards small- and medium-sized enterprises (SMEs), which typically command higher margins. Driven by initiatives such as a same-day delivery service, mobile app and dedicated SME sales team, increased revenue from SMEs more than offset £8m in lost sales from Carillion’s liquidation in 2019. Overall it managed like-for-like sales growth of 0.4 per cent for the year.  

A Brexit-induced construction slowdown is, admittedly, a huge potential bear point for a business that derives over 60 per cent of its revenue and 85 per cent of gross profit from hiring out tools and equipment in the UK. Based on the calculations of broker Peel Hunt, excluding acquisitions, the first quarter of this year has seen hire revenue slightly down, amid lower volumes from large contractors, but also Carillion’s overhanging impact. But, revenue growth from SMEs has accelerated to 28 per cent. Some areas of construction such as housebuilding remain strong, and a potential Brexit resolution could unlock deferred investment, boosting activity.

Meanwhile, the group is targeting faster sales growth in its non-cyclical services division, which is benefiting from increasing regulation. With an estimated annual addressable market of £1.45bn, Lloyds British undertakes testing, inspection and certification of equipment. The addition of training group Geason has increased cross-selling opportunities to the core rental business, especially as training centres will open in hire depots this year. These asset-light activities should boost ROCE, moving Speedy closer to its 15 per cent target.

SPEEDY HIRE  (SDY)    
ORD PRICE:50.6pMARKET VALUE:£263m 
TOUCH:50.6-50.8p12-MONTH HIGH:66.0pLOW:45.0p
FORWARD DIVIDEND YIELD:4.9%FORWARD PE RATIO:8 
NET ASSET VALUE:40.7pNET DEBT:42% 
Year to 31 MarTurnover (£m)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
201736916.22.51.0
201837725.94.01.7
201939530.94.92.0
2020*43036.15.62.2
2021*44239.96.12.5
% change+3+11+9+14
NMS:7,500    
BETA:0.49    
*Peel Hunt forecasts, adjusted EPS and PTP figures