determining the inherent value

HST is just another example of a company that has made ambitious acquisitions that have not paid off. This is no different to the listed property trusts.

However, like the listed property trusts, whilst a lot of money was lost by investors who bought in at the pre-GFC levels, a lot was also made by those who bought at steep discounts to NTA post their recapitalisations. Goodman Group, Charter hall Office and Retail and some of the ING Funds are all examples of this.

HST may also fall into this camp, subject to how the recapitalisation pans out. I thought I'd put a few thoughts on this thread for hot copperites to mull over.

I'm using the Dec 31 2010 financial position as the basis for my analysis, so you may wish to download this from their ASX announcements.

As at Dec 31, HST had borrowings (current & non-current) of circa $280 million. The announcement today made it pretty clear that the banks want any capital raise to reduce this, which is only natural because the banks would be very concerned about this company going under if Lazard don't stump up their equity. And note, banks are used to going mortgagee in possession on property, but they don't step in and run refrigeration businesses.

As a private equity fund, Lazard will want to keep as much gearing in the business as possible (debt is cheaper than equity), but not to the point where they risk wiping out their initial capital investment or being at the mercy of the banks at any point in the future. They'll also be mindful of the goodwill component in the non-current asset line (currently $320m), as its highly likely that this number is still over-inflated. However, if they can preserve this goodwill, this will significantly help their valuation when they want to exit (remembering that this is what private equity do to make money).

As such, my thinking is that Lazard will seek to be part of a bigger equity component. I've assumed a total number of $200m. I've also assumed that all of this is used to repay debt, thereby increasing the net asset number to $431m.

I've then assumed two possible goodwill adjustments $50m and $100m. Assuming a third scenario of no change, this leaves a net assets number of $431m, $381m or $331m.

Currently, HST has 240 million shares on issue. Assuming a capital raise of $200 million, the question is what price they raise the money (therefore determining how many shares on issue)

My back of the envelope calculation is as follows

Raised Price New Current Total
200 0.15 1333 240 1573.3
200 0.2 1000 240 1240
200 0.25 800 240 1040

This then translates into the following net assets calculation

NAV based on Net assets of
Total Shares $430 $380 $330
1573.3 $0.27 $0.24 $0.21
1240 $0.35 $0.31 $0.27
1040 $0.41 $0.37 $0.32

My personal view is that Lazard will support a bigger capital raise, thereby providing greater protection for what will probably be a significant cornerstone equity investment (Babcock and Brown Infrastructure saw the same thing occur).

Based on a capital raise of 15 cents, with a $100m writedown of goodwill, bank debt is basically erased and the Net Asset Value is circa 21 cents (i.e. above the current price). If the capital raise is done at 20 cents, with a $100 m writedown, NAV is 27 cents.

As I believe my numbers show, there is a distinct possibility that buyers at these current levels have potentially strong upside provided Lazard underwrite a big capital injection. If they walk, it probably says something about the prospects for the company, but based on the fact that HST has a strong order book, that the company obviously needs the disciplines that Private Equity bring to companies such as HST and that Private Equity guys tend to do the deal (albeit at their price), then it's plausible to assume that HST probably starts to have reduced downside at these levels with a good chance of a circa 30-50% bounce on completion of a deal.

It's not for the faint-hearted, but there's not too many other opportunities on the ASX currently which have this sort of short term payoff profile.

Please note that I don't currently hold stock and am looking to invest prior to June 30.