I have always been puzzled by the array of consulting, PR, and recruitment companies that are listed in the UK. It is always a bit difficult to work out what they actually do and they seem to make endless streams of acquisitions. Huntsworth crops up on various “short selling” screens on Stockopedia so I thought it would make a good place to start.
Huntsworth is comprised of four divisions. The two main divisions are Grayling (a “Global Public Relations and Government Relations” company) and Huntsworth Health (a ” Global Healthcare Communications” company) accounting for 80% of revenue with Citigate (a “Global Financial and Corporate Communications” company) and Red (a “Specialist Brand Agency”) making up the rest.
It is difficult to be positive about Huntsworth on basically any metric. I tried hard but the best that can be said is that 2010 restructuring/re-branding did fairly well in adding just under £20m of sales. Unfortunately, the FY2010 performance appears to have been a high point for Huntsworth. In FY11 operating margins dropped to their five-year low and revenues only increased due to acquisitions. The company also recognized a few exceptionals which led to a really poor performance.
If one breaks down the figures further we can tell straight away what the somewhat unsurprising problem is: acquisitions. The company has grown goodwill at a 5yr CAGR of 6.06% whilst revenues have only grown 2.97%. The company has spent £83.5m on acquisitions (net of disposals ~£67.7m) over the past five years but produced only £83.8m of CFO and £73.6m of FCF. Goodwill as a percentage of total assets has increased from 74.4% in FY 07 to 83.8% in FY11. In other words, the company has made a lot of acquisitions but gone nowhere.
What is even more extraordinary is that whilst free cash flow has continued to stagnate the company has continued to pay out huge dividends and continue hefty buybacks, since 2007 ~£31.5m worth. Working out how the company filled the resulting gap of some ~£25.6m is difficult, a combination of debt and drawing down cash balances would appear to be the most likely solutions.
Unfortunately, the tale of woe does not end there. Capital constraints are being combined with pressure on margins. The main cost for Huntsworth is wages and although the company hasn’t hired more staff and sales per member of staff has continued to grow the total wage bill has increased faster than revenue. This alone is concerning but in FY11 the profit per staff figure declined for the first time*.
Again, this may not be concerning if everything wasn’t moving in the same direction. The mysteriously named “Other Admin” has increased even faster than total wages, it is now at a hefty £34m. Leases and capex have also continued to grow, although not quite as fast. The only bright spot has been the decline in net finance costs however over the past three years this cost has multiplied financing acquisitions and returns to shareholders. The net effect has been that the “fixed costs” of doing business have increased by around 226bps over the past five years and by an extraordinary 463bps over the past year. The company now has only around 1200bps to spare.
The final point to note is the company’s working capital position. To be honest, I am not really too sure how to view this. However, it is worth highlighting that through FY11 current liabilities fell by around 21% with no significant movement in current assets. If this was to reverse, the company has the cash on hand and the cash flow to weather the storm however, it would clearly be a difficult position.
I find it difficult to come to a firm conclusion here, the business is clearly not great and the management is even worse. From the long side one could say why doesn’t the company just stop returning cash to shareholders and stop making acquisitions, clearly this would save a lot of cash. Moreover, it is getting to the point where the company has little choice. Cash is low and interest expense is eating into slimming margins. At some point, the company is going to have to make some tough choices. However, the company has really shown little sign, so far, it is planning to do any of this. Indeed, it seems more optimistic than ever. It has just increased its credit facilities to £110m, it is now paying a scrip dividend, and there was ~£17m of deferred payment for acquisitions something that presumably isn’t going away quickly. At £110m I am thinking that the company is not obviously over or undervalued however, it is definitely one to keep an eye on as management shows no sign of recognizing any of the trouble that is written in the balance sheet and share price.