margin management and getting paid on time

I'd recommend that HST shareholders who are preparing to buckle in for the long haul have a look at today's preso (Link attached below), in particular pages 14 and 17.

http://www.asx.com.au/asxpdf/20110614/pdf/41z67g2rmzqbky.pdf

In essence, the company's margin has halved in the past few years from 5% to 2.5%. Putting this in context, it's like bidding to do a tender for $1 million, knowing that it's going to cost you $975,000. You still have to pay interest on your borrowings, plus tax out of your profits.

In a nutshell, they've earned roughly $2 billion in revenue, which translates to roughly $47 million in EBIT. With debt prior to the recap of $300 million, and an interest bill on this of probably $25 million, it's an extremely thin profit margin ($22 million or 1.1%) with no room for error.

Page 17 shows what has been happening to HST's working capital. Because the bank interest is always due on time, it makes life tough if your customers don't pay on time. This further reduces your margin. And their credit control has been terrible, obviously exacerbated by their current financial woes.

So for HST, it's a simple process going forward of avoiding growth for growth's sake, not tendering for marginal projects, manage your delivery (costs)on the projects you win and get your clients to pay on time. If they can get their margin back to 5%, which you would think is more like an industry norm (otherwise why tender), it's likely they can get EBIT back to $100m.

The negatives though are what will the labour pool be like given the demand for labour from the mining boom and what dilution have shareholders suffered.

Assuming labour force costs is not an issue (or can be passed on), an EBIT of $100m (twice the current level)with debt of $150 million translates into an interest cost of $12 million and Net Profit Before Tax of $88 million. Tax at 30% equates to $26 million so an NPAT of roughly $62 million. At a PE of 8 times (allowing for a best case EBIT where the company is performing at its prime), you get a market cap of $500m. With almost 1.4 billion shares on issue, you get to a share price of 35 cents, or double the price that Lazard stumped up.

Unfortunately for long-term holders, it's a long way from $1 and probably unlikely to get there ever again. However, it's not a bad increase from 14 cents if you buy into the recapitalisation story and effectively triple up.

re disclosure, I didn't buy any shares prior to the trading halt and will await to see how it opens later this week. I do favour a bounce but it will stick pretty close to 14 cents initially.