Hunting plc (LON: HTG)

Intro

Today, I’ll write about a special situation, which is not aimed for all investors – a good old net-net stock as defined by Benjamin Graham. Hunting plc is a British supplier to the oil and gas industry and hence has a highly cyclical business: Revenues more than doubled from 2016 to 2019 while EPS grew to almost £0.44 in 2019. After the sharp decline of the oil price at the beginning of 2020, revenue declined significantly and the stock price is down from more than £9 in May 2018 to approx. £1.4 at the moment.

Although the outlook is not rosy for the industry, it might still be worth to have a look at this company from a contrarian perspective, especially taking into consideration its solid balance sheet and its ability to weather also wild storms.

 

Valuation

A net-net stock is a company whose cash plus accounts receivable plus inventories minus all liabilities is higher than its market capitalisation. So let’s look at the H1 2020 figures (all numbers in £ million):

Cash: 50

Accounts receivables (current): 174

Inventories: 331

Total Liabilities: 139

=Net: £416 million

 

This amount divided by the total number of shares results in a net-net value (or liquidation value) of £2.5 per share. Comparing this value with the current share price, a discount of 45% can be calculated. Not including other assets on the balance sheets, such as property, plant or equipment, investments or tax assets, there should be a wide enough margin of safety.

In the first half of 2020, Hunting recorded a huge impairment of more than £170 million, of which £33 million was a mark down of its inventory. While additional impairments cannot be ruled out, companies typically try to avoid to have another impairment in the near future again and hence tend to be generous with the recorded impairment.

 

What’s next?

At the end of this month, Hunting will provide a trading update, where it will be crucial to see if Hunting’s sector has recovered at least to a certain degree. With current valuation though, this is a clear ‘balance sheet’ investment and prices above £2 should be reachable again as soon as the segment’s outlook will be improving.

 

Current Price

£1.4 per share