Friday, May 26, 2017

Harvey Nash Goes Smash

Harvey Nash Group (HVN) is a recruitment business. The company is diversified (no customer concentration risk) and operates in a number of geographies (e.g. UK, Europe, US). It trades for 56 million pounds, and I expect them to earn (based on their history) about 7 million per year. Since they have a net cash position of 5 million, this gives them an adjusted P/E of just over 7.

Management has shown a willingness to shutdown/sell operations in countries that are not doing well, and so I think the diversification gives them good optionality in that they can put resources to work where things are going well, and pull it out when things aren't, which I suspect helps keep them profitable.

I suspect one reason the stock is so cheap is that there is uncertainty with regard to what will happen with contract workers and offshoring due to Brexit. But one thing I like about HVN's model is that it's asset light. Therefore if revenues fall, I would expect the company can trim its costs and remain profitable. Even in 2009/2010 the company remained profitable.

They pay a dividend of about 5% of the current market price as well.

Over the last month, DBAY Advisors increased its stake from 17% to over 26% of the company. They did something similar at Creston last year before buying it out at a 35% premium to the market price. (You can track HVN's filings, where holdings are made known, here.)

Disclosure: Author has a long position in shares of HVN


Anonymous said...

How did you find this? Where do you screen for uk stocks that are small like this?

Trots is said...

Hi Saj,

What's your opinion on the very low and declining gross/operating/net margins for HVN? Not a concern? Also, most equity seems to be intangible, nothing to back up higher multiples.

As you well mention, over the last 10 years they have been able to generate positive earnings from continuous operations, but it seems totally missing bottom line growth.

Thanks and regards.

Saj Karsan said...

Hi Trots,

At this price, I'm not worried about growth. The margins do bounce around, but it's not clear to me that they will continue to decline.