A 15% dividend hike and a return to profit suggest that this firm is on the mend.
Rewind to 2007 and Speedy Hire (LSE: SDY) shares were riding the housing boom, touching an all-time high of 358p before tumbling down to earth as the credit crunch struck. Since then it's struggled, but has just reported its first annual profit since 2008, prompting me to take a closer look.
A Speedy solution?
Speedy Hire has made substantial progress over the last year, as today's final results show.
Underlying revenue rose by 4.3% to £326.4m, generating a profit before tax of £3.2m (2011: -£27m). Gross margins rose to 67.1% (2011: 61.3%), while operating margins for the group's core UK and Ireland business improved to 8.8% (2011: 7.1%). Net debt fell by 33% from £113.9m to £76.3m, despite a £20.9m increase in net capex.
Speedy has remained committed to paying a dividend, and the total dividend for this year has risen by 15% to 0.46p, giving a 1.8% yield at the current share price of 25p.
Attractive discount
Speedy Hire's net tangible asset value per share is 33.2p, meaning that it currently trades at an attractive 23% discount to tangible book value.
Its price to sales ratio is just 0.4 and the more demanding measure of enterprise value to sales ratio -- which includes debt -- is only 0.63, suggesting that continuing improvement in earnings should drive a re-rating of its share price to bring this ratio closer to 1.
It's not all roses
There are still a few flies in the ointment for investors. Although return on capital employed (ROCE) rose from 2.3% to 6.0% last year (a 161% increase), it remains below the company's cost of capital and needs to rise further.
Speedy Hire also looks expensive on a price-to-earnings (P/E) basis, with its adjusted earnings per share of 1.72p giving a P/E ratio of 14.5 at current prices.
Net debt remains a concern and needs to fall further; it accounted for 29% of cash from operating activities last year.
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Service-led future
Speedy Hire's recovery is far from complete but I think there are a number of reasons it deserves a closer look.
Speedy is now focusing on transforming itself from an asset supply company into a services company and has introduced training, testing, repair, inspection and maintenance services this year.
It is also focusing heavily on the lucrative regulated infrastructure market in the UK -- 25% of its revenues now come from the water, waste, energy and transport markets. Speedy Hire has recently signed a three-year contract extension with Carillion (LSE: CLLN), and has a five-year partnering contract with Morgan Sindall (LSE: MGNS). It is now the nominated or preferred supplier to 72% of the top 25 companies in the Construction News Top 100 -- a list that includes names such as Balfour Beatty (LSE: BBY), Kier (LSE: KIE), Mitie (LSE: MTO) and Galliford Try (LSE: GFRD).
I believe that the combined effect of a services and infrastructure strategy should be to improve margins and generate reliable cash flows; both essential if Speedy is to achieve meaningful growth.
A Speedy buy?
The last year has seen a return to profit for Speedy Hire; this year needs to see a continued focus on cash generation, margin improvement and debt reduction.
Although the current high valuation relative to earnings concerns me, I think the potential exists for a strong recovery over the next three to five years if the company continues to execute its recovery plan as successfully as it has done over the last year.
He avoided techs in the dotcom bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".
Further investment opportunities:
> Roland does not own any of the shares mentioned in this article.
