what went wrong, page-3

I think the initial roll-up strategy was okay. Roll-ups in a service industry can manage reasonable level of debt if well-run, as they are usually able to run at fairly stable margins, since the costs are weighted towards variable rather than fixed.

However, the most common flaw I think we've seen in listed roll-ups of services is that they sometimes forget that they are only as good as the quality and enthusiasm of their staff. It doesn't take too much aggravation and penny-pinching for a good sales consultant, project manager or sparkie to figure out that they'd might as well go set up by themselves. If services companies want to keep good staff, they need to be pretty clear about why staff actually work for them in the first place rather than working for themselves and make themselves attractive employers.

The other part of the equation here is then taking on very large contracts - I think most contractors would tend to agree that it's the mid-sized contracts that are the best buck for effort, as, with the largest projects, there is often too much haggling over every $. Large contracts in foreign countries create even more risk and hence the substantial debt write-offs.

In addition, most of this work is competitive tender, so low margin. The combo of high-debt, low margin, large contract risk and a slow down is a pretty big risk. Going offshore chasing property bubbles raised an alarm bell for me, but going into a slow down was always going to make it a high risk period.

I actually think HST will probably get recapitalised and survive. Provided they can still cover interest and if things really are on the improve cashflow-wise, then the banks will have a strong preference to see them continue as a going concern, as there is little in the way of assets to sell off beyond the order book. However, I cannot understand why they came out of suspension without an underwriting agreement in place to put a floor under the price, as there is too much uncertainty until new capital is raised.

I would also say that I think their disclosure is somewhat remiss. Most of their commentary has been consistently bullish leading up to the suspension and therefore disclosure did not match reality. Clearly at least some players could see through this though, given the prior price action.