If you look hard enough there is always value. A case in point is our investment in Hills Limited, the company made famous by the iconic Hills hoist. While the company no longer sells clotheslines, it’s been a rocky road for investors.
The share price peaked at $6.72 pre-GFC; it’s been a steady decline since then, reaching a low of 13.5¢ in May 2019. The last time the share price was in the teens was in 1985.
The company has been passed over by many as a boring old business selling products that are boring and not tech-y enough, but if you peel back the layers, Hills has a very attractive business hidden amongst TV aerials, Foxtel satellite dishes and other dull businesses that produce less-than-stellar returns.
At 13.5¢, where we started buying, the company had an NTA of 16¢ so there was a small margin of safety. The company is finally reporting segmental revenue and earnings numbers, and from that we have found a gem: a nurse call system used by patients in hospitals, to call a nurse and control the entertainment systems (patient engagement).
It’s been growing 20 per cent year-on-year, has high margins, and recurring revenue; it’s a SAAS [software as a service] model. Once a hospital has made the investment in installing the Hills system, it’s a capital investment that you don’t replace.
That system is now installed in 43 per cent of public hospital beds and 23 per cent of private hospital beds, with the opportunity for a move into aged care as well as cross-selling the patient engagement system. The private hospital dynamic is strong with the segment is growing due to an ageing population.
Unlike many of the WAAAX stocks, the Hills Health business produced revenue of $38 million and EBITDA of $11 million, so it actually makes a profit. That business segment alone justifies the whole market capitalisation of Hills so you effectively get the remainder – the distribution business – free.
It does get lost in losses and one-offs that impact the reported profit number, so you need to do some work to uncover that fact. At the same time, management have advised that they will be able to get $5 million of cost savings from the distribution business over the next two years, as well as some margin expansion. Some of the smaller businesses are being sold to give management more time to focus on the core distribution businesses which have a lot of revenue but no profit.
So we see this as a great little business that we didn’t pay too much for, where we have a growing SAAS gem hidden amongst some dull industrial businesses. We have the potential for a turnaround in the older distribution businesses, and a deleveraging effect as non-core businesses are sold, debt is paid down, and interest costs reduce.
Hopefully the company will get to a dividend paying situation in the not-too-distant future and long suffering shareholders will be able to get some income from their investment.
With one of the largest share registers for a company of Hills’ size, that’s a lot of people who will be slightly happier with their investment.
