Huntsworth rebounds from the recession
The economy may be struggling to recover from recession, but companies like Huntsworth seem to be well on the road to rude health. This morning the global public relations group reported a near 14% increase in revenue for the half-year to 30 June and a 337% increase in operating profit. Some of that revenue increase came from acquisitions, but there was organic growth as well.
The group earned a profit after tax of a chunky £7 million whereas it had struggled to make any profit at all in the corresponding period of 2009.
The operating profit margin recovered to 12.8% – much better than the 3.3% achieved in the first half of 2009. Huntsworth claims a higher margin of 15.7% because it adds back the amortisation of previously acquired intangible assets. Whichever way one looks at it, the improvement is very encouraging.
Huntsworth continues its gentle love affair with debt, having net borrowings of almost £56 million at 30 June. The group also expects to pay earnout entitlements of about £24 million in cash over the next three years. If this were to be added to the bank borrowings, the total debt would amount to £80 million.
However, that’s a lot less than the £196 million provided by shareholders (“equity”), and many companies would be pleased to have a debt/equity ratio of 0.40:1. Certainly Huntsworth’s current interest charges are well covered by its profits, although interest rates may be less favourable as time goes on.
The main risk that acquisitive companies like Huntsworth face is that shareholders’ funds might suddenly be eroded by impairment charges if and when purchase prices paid for previous acquisitions prove no longer to be justified by subsequent performance. However, Huntsworth has already been forced to take a £9 million impairment charge when it decided to streamline its business into four divisions last year, even though this decision resulted in no obvious change to the underlying value of the business conducted by the group (see Huntsworth and its irrational rationalisation charges). So any further impairment charge seems only a remote possibility, particularly if (hopefully) the economy is emerging from recession.
Huntsworth’s short-term liabilities continue to exceed its readily realisable assets. But the group seems to have mastered the art of funding some of its longer term assets by using credit taken from suppliers and/or deferred purchase commitments for companies it has acquired. It’s a useful source of free capital if not an overly prudent practice. And Huntsworth is not alone in doing it.
© Fintellect Ltd