the impossible stock

I've tried buying this stock, but so far no luck. So am just going to take out my frustrations by writing about it instead...

This is possibly one of the most undervalued shares on the ASX but caught in a catch-22 situation regarding liquidity and share price. Something which will become obvious later in this post.

I have followed HIT for a few years, as they have been one of the smallest companies on the ASX to report a profit in past years. They are an IT personnel company, with recruitment and contracting services specialising in IT. They were formed in 1993 and listed in April 2000, just in time to bear the brunt of the tech-wreck. Listing price was 70cps. They offered 5.35m new shares and 5.35m existing shares from a total of 31m shares - the number of which has not altered since. The business was built and continues to be controlled and managed by the Hazouri family. Unfortunately, about 87% of shares remain held by the top twenty shareholders.

In the first year of listing, revenues were $11.4m. Operating profit before abnormals and tax was$3.2m and after abnormals/tax was $1.2m. They paid a final 2cps dividend. Following the tech wreck, revenues fell to a low of $4.4m in 2005. Since then, they have recovered somewhat to around $5.5m with profit reported at $136k after tax (full tax paid).

The shares last traded in April 2010 at 1.5cps, putting the company on a market cap of just $465k - low enough to go 10-bags and still be a micro-cap! It's a P/E of 3.4. The company also has no debt and cash on hand of $536k. Better still, they have current assets less total liabilities of $1.5m - more than 3 times market cap and not a candidate for going broke (which is the usual explanation for this sort of beat-up!).

The directors outlook statements were positive but cautious - there is no impression given of a big leap in profitability coming up. However, going to the AusTender web-site and searching federal tenders gives a somewhat different impression. Although publish dates for contracts don't cleanly match up with revenue reporting, the increase in contracts this year is so marked that it can hardly not show up in the accounts. For instance in Jul09 - Dec09 period, there are a total of $1.1m of contracts to Hitech Group or Hitech personnel. In the Jan10-Jun10 period, there are a total of $1.4m. But in the period from Jul 10 to current (i.e. 3.5 months) there are a total of $4.2m. On a proportional basis, this is an increase of 500% over first half last year. So it therefore seems surprising that directors aren't being a little more upbeat - and I'd be prepared to bet a few $'s on a decent increase in profitability for the current financial year...

Unfortunately, they are virtually impossible to invest in. Recently (before I tried to buy some) the spread looked something like buyers at 0.7cps, sellers at 6.5cps... try explaining to the broker why you're going to buy at 6.5cps when the last traded was 1.5cps! Perhaps, should the AusTender prove a reliable indicator, the 6.5cps may still be good value -but until there is firmer indication from the company, buying the small amount available there holds a significant risk of discovering that the next trade goes through at 1.5cps and stuck sitting on a 75% loss.

This company has become so firmly stuck in a liquidity trap that perhaps the only way forward is for the directors to take it private again. To buy even the smallest parcel I'd consider worthwhile holding, would mean becoming a top twenty shareholder based on last traded price... accumulating that many is probably impossible. The share price can't move without liquidity... no reasonable holder (who probably purchased much higher) is going to accept the costs of selling a small-value holding at this price. Catch-22. The impossible stock!