Tag: HRG

  • Hogg Robinson: Waiting for the Smoke to Clear

    Disclosure: I have an interest in Hogg Robinson shares

    Introduction

    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:

    HRG_Revnue (more…)

  • Hogg Robinson (HRG)

    Assets vs. Earnings

    A semi-thematic post takes me in a different direction today as I split from last week's post - on hotel groups - and dive into what I guess is the opposite sphere of value. Many of those companies could be considered cheap because they traded at discounts to tangible book value; the one I distinctly decided wasn't cheap was Intercontinental - in their case, you get very few net tangible assets for your money. The multi-faceted nature of investing means that there is always two sides to every story, though, and within a few hours red commented with almost the opposite to my gesticulations - that Intercontinental, in fact, looked to be reasonably priced, and that their lower price-to-book peer which I had highlighted was, in fact, slightly less golden.

    The pivotal point, it turns out, is that metric I was discussing; the amount of assets you get for your money. I generally like companies with more assets to those with fewer - red prefers those with less, since:

    ...  more of the gross profit gets passed down to profit (via lower depreciation) and more of the profit is distributable (because growth needs minimal capex)

    It's easy to see in real life terms, too, how less asset-intensive business models are more scalable. Amazon and eBay compared to brick-and-mortar retailers is basically a case in point of this! I still harbour that lingering doubt about firms with no asset backing, though; without assets, what's protecting the value of my investment? The shallow version of this is a straight observation that the liquidation value is below market value. Is that relevant if liquidation isn't likely, if finances are sound and the business is profitable? No, not really - since, by definition, if the company is using these few assets to make a great deal of profit - earning a high return on them - there would be no point liquidating them. There is value there, just in flaky intangibles - the systems in place, perhaps customer relationships, perhaps some regulatory barrier. (more…)