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Haynes (LSE:HYNS) seems to have shocked Mr Market with a profit warning yesterday. Apparently, sales of printed manuals are declining in the US and Australia, as they have for at least six years. This is disappointing. But the key question is whether the core business is badly damaged.
The first thing to note is that the core business is no longer printed manuals. It is electronic delivery of information to professional mechanics through HaynesPro.
While this division accounts for less than one-third of turnover it dominates a profitable and growing niche market, supplying 40,000 mechanics across Europe and receiving 1,000,000 information requests per day. It provides 90,000 drawings, tips and fixes for over 13,000 vehicles as well as service schedules and technical data. It is already market leader (No. 1 or No.2) in many European countries. (see earlier Newsletters on Haynes 11th – 19th Feb 2015, 8th – 12th Oct 2015, 29th Oct 2015 and 4th – 8 Feb 2016).
With the loss of 41 US employees, HaynesPro, with 111 European staff, will employ more than one-half of the people working for the Group.
Note that the Trading Update came with this very significant sentence: “In the UK & Europe, management are able to report a more positive position, with the Group’s consumer and professional businesses both performing in line or ahead of expectations.”
In a recent interview conducted by fellow shareholder, Simon Hedger, the directors said “HaynesPro throws off a lot of cash and has been self-funding since they were acquired [in 2008]”
What about the other operations?
Even the traditional printed automotive manual business is being brought into the electronic age. The paper versions are now supplemented by a growing range of online manuals and add-ons.
The third Haynes business, non-automotive manuals business (e.g. Cycling, Death Star, Caravanning), marches on totalling about one-tenth of turnover.
The question is whether the share price, giving a market capitalisation of £15m, has fallen so far that it more than incorporates the bad news. If there is an underweighting of the potential for good news to crop up over the next few years then the share price should rise, if the good news does materialise.
I have to admit that the chances of really good news coming along is less than 50%. But if it does, then the share will be a multi-bagger.
Some possible good news
It is possible to conceive a scenario in which HaynesPro continues its trend of raising sales by double digits as it exploits its oligopolistic/monopolistic positions in Europe.
It is also possible that the managerial team will focus on profitable niches within the printed manual business. This will mean regular jettisoning of unprofitable activity. No doubt this will be accompanied by regular “exceptional costs” and large difference between basic earnings and “underlying” earnings. But we can live with that, while the business gets itself in order.
After all the balance sheet is strong (soon be even stronger with the freehold land gaining value) and the two most expensive executives have left the company – not only did they preside over a virtual halving of sales in the US and Australia, but they ensured that they received up to £1.3m annual remuneration between them; their removal should boost the earnings per share for this reason alone.
Some background data (to put in perspective the latest announcement):…….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
