Stephen Bland examines a small finance company that looks a little too cheap.
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| Share | Hitachi Capital
(LSE: HCU)
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| Website | hitachicapital.co.uk |
| Price | 256p |
| Market cap | £109m |
| Directors own | <1% |
| Other majors | 65% |
| Eps y/e 31/03/06 | 26.4p |
| Historical P/E | 9.7 |
| Div y/e 31/03/06 | 11p |
| Historical yield | 4.3% |
| Tangible book 30/09/06 | 138p |
| P/TBV | 1.9 |
| Eps forecast 31/03/07 | 27.6p |
| Eps forecast 31/03/08 | 29.5p |
| Forward P/E 31/03/07 | 9.3 |
| Div forecast 31/03/07 | 12p |
| Div forecast 31/03/08 | 13p |
| Forward yield 31/03/07 | 4.7% |
Hitachi is a finance company, lending money for business and consumer purchases. It is not a pyad play for two reasons. Firstly, it trades well over book with a P/TBV of 1.9 and secondly, it does not have net cash. Companies involved in money lending rarely have net cash because they normally finance the majority of their lending via debt. The effect is that gearing is enormous and way above any kind of usual value criterion.
If I took gearing into account, it would rule out nearly all banks and finance companies as value plays so I tend to ignore it when considering this type of business, otherwise I would never buy them even though I believe they can be attractive. Their very business consists of borrowing and lending cash, so net debt or net cash figures are not even usually supplied by databases for banks and the like.
Having got that bit out of the way, Hitachi looks attractively priced to me. Normalised eps has been steadily increasing for some years as has the dividend. In the year 31/03/02 eps was 17.2p and the dividend 8p. This rose unbroken to the 06 figures of 26.4p and 11p respectively with the forecasts for the next two years expected to continue the trend for an 08 forecast P/E of 8.7 and yield of 5.1%. Not bad figures.
The trend is confirmed so far by the interim figures for the half year to 30/09/06 released recently, showing a strong rise in eps and an increased dividend, supported by generally encouraging directorspeak:
"While conditions in some markets have been challenging and we expect they will remain so in the second half, we remain confident that, given growth in other markets and investments in premises and systems, the group will continue to deliver profitable growth"
In common with the results from many other banks and money lenders this year, the proportion of arrears increased in the period. I expect this is a symptom of the widespread indebtedness in which the UK population has placed itself. Generally in my view, the more debt is incurred the greater will be the proportion of arrears and bad debt because the quality of the book is likely to decline somewhat as debt increases.
Putting a figure on it, the company reports in the interims that
"Group arrears rose to 2.02% (2005: 1.18%) during the period, which reflects an
overallindustry trend."
I don't though consider this sufficiently worrying to detract from the share's value appeal.
One important point on Hitachi is that 65% of the shares are owned by the Japanese parent company. A recent press release stated that the company is in talks with the parent to reduce the latter's interest, though it was reported that they won't go below 50% in the short term. Whether or not a major or controlling interest affects the share's value qualities is debatable. Some investors don't like it, others don't mind. Personally, it has never stopped me buying an otherwise attractive value play. Clearly there can never be a hostile takeover bid for such a company so that exit is barred. But it doesn't rule out agreed bids where the major holder sells its stake to a third party or bids itself for the outstanding shares.
Summing up, I think Hitachi is a little too cheap given its history and forecasts.
