The Motley Fool

Will recovery plays Mothercare plc and HSS Hire Group plc come good in 2017?

Shares in turnaround plays Mothercare (LSE: MTC) and HSS Hire Group (LSE: HSS) fell by about 6% this morning after both companies issued uncertain trading updates.

Mothercare and HSS have both lost about 50% of their market value over the last 18 months. Is it time for investors to place bets on a recovery at each company, or do fundamental problems remain?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

A tough challenge

Mothercare chief executive Mark Newton-Jones did his best to put a brave face on a poor set of interim results. He told investors that “the second half has started in line with our plans and the business is well prepared for the important peak season.”

According to today’s report, 60% of UK stores have now been refurbished, and the majority of unprofitable stores have been closed. The group’s internet presence has been upgraded and 40% of new business is now generated online, up from 36% last year.

It’s certainly true that the second half of the year — including Christmas — is critical for Mothercare. About 65% of annual profit is made during this period.

Mothercare’s underlying earnings rose by 3% to 3.4p per share during the first half of the year. On this basis it’s possible that full-year forecasts of 10.1p per share remain realistic. These put the stock on a forecast P/E of 11. Expected earnings growth of 18% next year means that Mothercare’s P/E multiple falls to 9.4 for 2017/18.

I’m sitting on the fence here. Although Mothercare’s sales do seem to be stabilising, the group is plunging back into debt as it upgrades its stores. The underlying loss at the UK business rose by 44% to £8.8m during the first half. My concern is that Mothercare’s decline has coincided with a weak period for the high street. Recovering from this could be tough. I believe there are better choices elsewhere in the retail sector.

This looks bad

Revenue rose by 10.9% to £256m at equipment firm HSS Hire Group, during the first nine months of this year. The company said operating profit before amortisation costs (EBITA) rose by 6% to £14.6m over the same period. This metric includes the effects of depreciation on HSS Hire’s rental equipment, so it’s a reasonable measure of cash profitability.

The group’s profit margins also seem to be recovering. HSS’s EBITA margin was 6% during the first nine months of last year. The equivalent figure for this year is 5.7%, but the company says that this has risen from 4.5% at the half-year mark.

Unfortunately, the firm’s turnaround plan is taking longer than expected. It will now extend into the first quarter of next year. Q4 trading is expected to be poor and management expects full-year EBITA to be below expectations.

That’s bad enough, but HSS Hire’s overwhelming problem is debt. The firm’s property and hire fleet were valued at £185m on 2 July, but the group’s net debt is now £240m. HSS is effectively in negative equity.

Because debt always takes priority over equity, my view is that HSS shares are worth very little at the moment. I suspect the company will be forced to raise cash from shareholders at some point, in order to reduce debt. I certainly won’t be investing in this turnaround story.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.