Disclosure: I have an interest in Hogg Robinson shares
I classify investments into ‘themes’ in my head. The theme explains why or how the market is mispricing a security. It might be that the asset is in a sector or geography which is particularly unattractive for whatever reason, but the company involved is more insulated than a casual glance would betray. It might be that the company has a number of very valuable assets which are obscured by fluff, by investment in the future (opex as capex), or by loss making divisions which drag down the group picture while allowing management a clear remedy, should they choose to take it. Either way, it helps me if I can see why smarter people than me might be unable to see the attractiveness of an asset.
Hogg Robinson, thematically, fits in with Quarto in my mind. Every investment is different, but the premise is similar:
The business is being attributed a very high cost of equity – similarly a very low P/E – because the market thinks that the business has a combination of declining cashflows from a dying business and substantial cash obligations. One of these factors alone is a cause for concern. Both, together, raise fundamental questions about the value of the equity.
In Quarto’s case, their supposed millstone is the debt pile. In Hogg Robinson’s case there is also a touch of debt, but a much more sizeable pension deficit. In both cases, the black mark – QRT’s debt and HRG’s pension deficit – in combination with one’s inner reaction to the business they’re in – is prominent enough to turn the vast majority of investors off before getting to know the company.
The market view
To set up the mental model before we knock it down, then, here is what the market sees when it looks at Hogg Robinson: