Havelock Europa (AIM: HVE, SP=14p) - where are the results?

A keen member of DIY-Investors.com (Mike W.) e-mailed me to ask what my views were on Havelock Europa (AIM: HVE).

The background to HVE is that it moved from the main market to AIM and in recent months a private investor (Andrew Burgess) has been steadily buying a stake in the Company and now owns 13% of the £5.9m Company. Preliminary results for the year ended 31st December 2010 were expected by today (23rd June) but have still not been published. Enquiries of the Company have elicited the fairly unhelpful response that they will be posted by the end of the month. Not surprisingly, Mike and many other investors are concerned about this (take a look at any bulletin board to confirm this).

The shareprice graph for the past 4 years makes a sorry picture (see below):

My response to Mike is set out below...

Dear Mike,

You will not be surprised to learn that HVE has been on my watchlist for
some time, particularly as it so typifies Companies that are depressed and
unloved. As mentioned in the book, they offer opportunities for
significant upside as they recover.

Looking specifically at HVE, my immediate comments are:

1. It has a very low PSR (good). If you look at the past operating margin,
it has consistently been between 5% and 6.9% over the 7 years (2002 to
2008). On recovery, it should be able to get back to 5%. As HVE hasn't
diluted its shareholding (yet) and has finance in place - therefore
unlikely to have a rights issue or placing (hopefully), then trading its
way out of trouble gives rebound possibilities. It's not beyond reasonable
expectation for HVE to get back to eps of 8 to 10p in two to three years
time - giving a very low PE ratio.

2. You are right to note the private shareholder (Andrew Burgess). There
are several well known people of this name, so it's not possible to find
out who this one is - well at least for you and I! Have a look at what
happens when you 'Google' the name (2 or three possible candidates in the
field of investment/business pop up). You'll recall from "Picking Winning Shares" (PWS) that in the
case of GTL Resources, I had picked up the potential significance of a
large shareholding by a private shareholder (see PWS, p.24).

3. In terms of shareprice movements, it has all the classic stair step
recovery shape - particularly since it broke up through the 200 day moving
average. If the results are not as bad as people seem to expect, then 2011
could be a reasonable year for you as an investor in HVE.

4. In terms of the markets that HVE operates in, I do have some knowledge
of these as I run a Company of architects (for my day job). ESA school
furniture (labs & technology workshops etc) should recover as school
spending picks up - the Government have started to put some funding into
the new Academies. Also, retail and banking spend on fit outs is gradually
increasing (see also Styles and Wood [STY], whose shares are also showing
similar early stage recovery signs).

5. The printing side of HVE, coupled with the investment and growth
reported at the interim stage could also be a good story.


Having taken a little longer to review the fundamental and technical analysis, the following additional points may be relevant:

a) Net debt has been rising £19.9m at 31/12/2009 although at that date, less than £3m of that seems to be short term debt. At the interims, released 23rd September 2010, this had risen to £22.3m. The Company stated at that time that "The group continues to operate within its new bank facilities".

b) The shareprice graph for the past twelve months makes interesting viewing...

Note the following points:

• Rising OBV (good)
• 200 day moving average has now turned up (good)
• SP (at 14p) is not too far above the 200 day moving average
• Any further slight drop should be supported by the support line (which was previously resistance) at about 11.3p

Lets take a look at the key metrics (below)...

This shows that the year ended 31/12/2009 was a very poor one for HVE. That said, if the prospects are improving (as suggested in the interim results), then with only 38.53m shares issued a rebound in the eps and possible re-rating is a strong possibility.

c) If the turnaround happens and dividend payments are resumed, then the current purchase price of a share could easily be repayed by dividend payments over the next 5 to 7 years.

d) Could a bid be forthcoming (or even be under discussion by the Board now)? The Company seems to be trading at about its tangible book value.

e) Speculation: Is the digital printing operation (now at Letchworth) benefitting from the run up to the Olympics and/or slightly improved economic conditions?

In conclusion...

A risky turnaround prospect, because of the debt - but aren't they all?

Usual caveats - do your own research etc...

Mick.