HGL: A Microcap with Growth & Value Options

Mark Tobin

HGL Limited (ASX: HNG) is a mini-conglomerate containing predominantly distribution businesses. HGL distributes some of its own propriety brands and third party brands in the Australia and New Zealand market. The business has been in a turnaround or self-help mode for the past 3 years and these efforts are now starting to bear fruit. The board and the management team have sought over recent times to divest non-performing brands, restructure the business to cut costs, and streamline continuing operations to improve ongoing productivity and margins. They have also sought to position the brand portfolio to be split 50:50 between propriety brands and agency brands. Currently, 30% of sales are coming from propriety brands.

The company has a colourful mix of business units spanning distribution activities in categories such as building products, personal care cosmetics, home improvement, soft furnishings and homeware, fabrics and needle craft, model cars and retail point of sale solutions. In addition, HGL has a 50% joint venture in a school uniforms business. However, out of this gallimaufry, the two principle business units which catch the eye are its building products business and its school uniform business.

A quick look at both, firstly the building products business

Its JSB commercial lighting business provides the bulk of the HGL's revenue and earnings. Given lightings place in building development projects, JSB is now starting to see the impact of the recent spurt in the housing development of the last few years and should see healthy demand in the next 12/24 months at least.

Its second major business which contributes a large portion of earnings is its 50% JV in Mountcastle, the school uniforms business. The venture has been growing nicely in both the public and private school uniform space over the past few years and provides HGL with a healthy profit contribution from its share in the JV. This is an attractive business with customers who are sticky or long term clients with manufacturing secured in low-cost Vietnam and Sri Lanka. A recent partnership with The School Locker group should continue to help grow volumes, especially in the public school uniform market.

The rest of its divisions are either, making a small profit, breakeven or loss making meaning that should any of the business improvement strategies well under way in these business units come together it will provide a nice kicker to the bottom line. There is also the possibility that a few of these business units could be deemed non-core at some point in the future and be disposed of to free up capital to invest into JSB Lighting or Mountcastle.

So for the growth investor, HGL it is currently trading around 55c with a market cap of $31mil with net cash of circa $4mil. This puts it on an estimated FY17 P/E of 11 times with estimated EPS growth of 15%. Management have also said they are looking for a suitable acquisition to provide them with more scale.

However not forgetting the value investor, if they are not all in Omaha! The accounts reveal $18mil of gross revenue losses, no tax to be paid for a while, $11mil of capital losses, handy if they sell any business units for a profit. A healthy balance of $9mil in franking credits which provides you with a circa fully franked dividend yield of 4.5% and NTA of 29c per share.

Thus for either growth or value investors in my mind its interesting.


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