Simon Gordon
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ERG is a stock I have been invested in for the past four months.
Just now they are taking over Hercules Property Services and the new ERG will move into the Small Cap Index in December.
Below is some data I have compiled on this stock and I hope it is of interest to you.
ERINACEOUS GROUP PLC (ERG)
Floated on AIM, November 2003, it is a one-stop shop for property services in the public and private sectors. There are three main divisions:
1. PROPERTY SERVICES DIVISION - HAYWARDS PROPERTY SERVICES
Comprised of four sub-divisions: Public Sector Housing, Residential Management, Building Consultancy and Facilities Management.
2. RESIDENTIAL LETTINGS DIVISION - HANOVER PARK SERVICES
The market leading provider of tenant referencing, rent guarantees, insurance and software solutions to 8,400 lettings agents and 3,200 registered brokers/IFAs.
3. INSURANCE DIVISION - HANOVER PARK COMMERCIAL
Provides policies for Haywards, Hanover Park Services and selected niche markets.
FINANCIALS
2004 - actual
T/O - 42.2m
PBT - 6m
EPS - 9.8
DPS - 1.75
2005 - forecast
T/O - 67.2m
PBT - 8.4m
EPS - 13.5
DPS - 4.5
2006 - forecast
T/O - 78.9m
PBT - 10.6m
EPS - 16.6
DPS - 5.5
SUMMARY
An ambitious group, operating in growing markets, that are fragmented and ripe for consolidation. Profit lines are visible, long term and recurring.
UPSIDE
EPS Growth Forecast - 2005 = 38%, 2006 = 23%.
Forward P/E of 10.5 at £1.42 per share.
DOWNSIDE
Management - over reaches.
ISG Occupancy - integration goes pear shaped
‘A company’s chosen strategies - for product quality, technology, vertical integration, cost position, service, pricing, brand identification, and distribution channel focus - drive its performance and competitive position. A company’s strategic choices, in combination with its skills in executing them, determine its prospects for creating value.’
A. Rappaport and M.J. Mauboussin from the book Expectations Investing.
After visiting the HQ in Croydon and being briefed by Neil Bellis for two hours, I confidently state that ERG are totally focused on, professionally, driving and executing the strategies articulated by Rappaport and Mauboussin.
The following is an outline of some key points accumulated from the meeting and published material:
Residential Lettings Division
They process 1,000 tenant references per working day at £20 a pop. Growing to 2,000 per working day, which will happen this financial year, means a lot of profit dropping straight to the bottom line - due to technology infrastructure and system productivity.
The two joint managing directors complement each other - one is strong on technology, the other marketing. They are of boardroom calibre.
There are no plans to make takeovers, growth will be organic.
The additional fifteen sales people have been intensely trained, one has dropped out.
Jordans - the plan is to franchise; with a top notch management team in place.
Property Services Division
The public sector division which has the Westminster Council contract will get orders but they will be lumpy in coming. When landed they will be long-term and profitable. For instance Croydon Council are looking to outsource their property requirements and ERG are now able to offer a one stop shop for the residential and office requirements. The current order book stands at more than £200 million for this division.
ISG Occupancy cost ISG Interiors £27m to assemble and ERG bought it for £10m, with 50% of future payments on the outstanding £6.6m able to be made in shares.
With the ISG Occupancy takeover ERG now has the opportunity to expand it’s service offering outside the South East of England, with offices in Bradford, Bristol and Manchester.
Productivity as a Competitive Advantage
ERG has a clear focus on using productivity to be cost-efficient, drive sales capacity and invest capital profitably. Utilising people, property and technology; such as teleconferencing, document imaging and computer software.
The new HQ in Croydon is a sleek set-up which will act as the nerve centre to steer the divisions effectively.
Neil Bellis
A youthful 50 year old, with bags of charm and the skill of explaining complicated processes in a clear insightful manner. Not anxious or hurried, he is a grounded and centred man, who connects with people immediately. Optimistic, yet this is tempered with realism when explaining ERG’s business opportunities. He is a winner who oozes ambition.
Goals
ERG has a goal to become a FTSE250 stock. They could either do this in two or ten years. Two years would be by further acquisitions, probably using paper - if rated higher by the market. Ten years would be by organic growth.
Share Price
ERG had expected the share price to be around £1.80 by now and realise they must build a deeper rapport with the City. ERG is presenting to the City and I expect they will lock-in some business minded investors.
Dividend
ERG is managed by people who own a large chunk of shares and they plan an aggressive dividend policy, as it is part of their remuneration.
Management Incentives
They are growing this business as entrepreneurial owners not as executives. The main board directors and operating-unit executives are heavily incentivised to deliver. Middle managers and frontline employees are well paid.
Profit Drivers - 2005 Forecast
Residential lettings - 5.3m
Haywards - 4.2m
Insurance - 1.5m
HQ Cost - minus - 2.3m
Interest Charge - minus - 0.3m
Profit before Tax - 8.4m
Beating Expectations
2005 EPS of 13.5 and DPS of 4.5 are forecast. Neil mentioned Mears and it’s history of beating expectations. ERG’s 2004 earnings surpassed expectations and I expect ERG to the follow the Mears policy.
City Living
The City’s understanding of ERG is gradually building. The buy-to-let connection is a perceptual hindrance, as is the acquisition strategy for growth. It will either take a big Haywards contract or December’s interims for the City to awaken further to the ERG business model.
Taken Over
ERG would accept £3.00 per share, as of 26/8/04.
Dangers
Neil thinks the main danger to stop ERG delivering would be management execution; he has his eye on this!
ISG Occupancy integration goes pear shaped.
Management over reaches.
Summary
Profit lines are visible, long term and recurring.
Balance sheet is finely calibrated.
Will they succeed?
Rappaport and Mauboussin succinctly state it best:
‘The probability of this outcome depends on management’s vision and execution skills - as well as on top management’s ability to convince the market that the company has a sound business model that deserves a higher stock price.’
HPS Takeover Musings - 28/29 September
2005 - March
T/O - 100m
ERG - 12 mths. - 9m ebit
HPS - 9 mths. - 9m ebit
Ebit - 18m
Interest - 3m
Tax - 4.5m
Profit - 10.5m
DPS - 4.5
EPS fully diluted 100.6m shares - 10.4
EPS fully diluted 106.6m shares - 9.84
2006 - March
T/O - 124m
ERG - 11m ebit
HPS - 13m ebit
Cost Savings - 2.5m ebit
Ebit - 26.5m
Interest - 3m
Tax - 7.05m
Profit - 16.45m
DPS - 5.5
EPS fully diluted 100.6m shares - 16.35
EPS fully diluted 106.6m shares - 15.43
I base the EPS on 89m shares in issue and options of 11.6m making a total of 100.6m shares fully diluted.
I base the EPS on 95m shares in issue and options of 11.6m making a total of 106.6m shares fully diluted.
89m x £1.20 = 106.8m market cap. plus 11.6m options
95m x £1.20 = 114m market cap. plus 11.6m options
Net Debt - 33m
The way I see it is that ERG are basically at the same place as before the takeover but that now they will go into the Small Cap. Index and have the opportunity to sell themselves to the fund managers who will ultimately get the share price up.
Groupama dumped them so they lost their underwriters.
September 11th caused premiums to rocket whilst Groupama was ditching them and they lost clients and margins got compressed. They now use Munich Re.
Also from what I can see they bought lots of companies but didn't integrate them under specific brand names, with central management. Too many sub-divisions. They are putting this right now, hence some divisional profits are down for 2004.
The main brands now are:
Cadogan Insurance
Farr Insurance
Dunlop Heywood Lorenz
Wood Management
Gross Fine
Harman Healy
It will be interesting to see which ones will be re-branded Haywards.
After this ERG will still have three main divisions:
Property Services
Residential Lettings
Insurance
Shareholders will now have to wait and see if Neil Bellis can sell the company to the Small Cap. fund managers.
But on a forward p/e of 7.2 for 2006 and a DPS of 5.5p it looks good value!
At the moment I can see only two possible counter bidders - MITIE and Mouchel Parkman.
Before the takeover ERG was valued at 63m for 11m ebit in 2006. Now the new ERG is valued at 104m (at £1.20) for 25.5m ebit in 2006.
I think the balance sheet is fine and that is why ERG only offered 10m, as it didn't want too much bank debt.
I think after this deal ERG will build to get into the FTSE250 in 2006 - probably by using deferred debt when taking over any new companies - I don't see them doing another big paper deal like this.
The cash flow of the new ERG will be very strong and debt I think will be paid down swiftly.
So at the moment the new ERG is valued at around 100m, to get into the FTSE250 you need to be around 300m. So if they do the integration well and the profit lines keep humming and Neil Bellis impresses the fund managers the share price could be £3.60 in 2006.
Takeover History
At the beginning of 2000 HPS comprised:
Deacon
Dunlop Heywood
Harman Healy - commercial
DGA
Simmonds Partners
2000
Farr - 20m
2001
Baker Lorenz - 5.75m
Cadogan - 4.8m
Kounnis Brokers - 5m
Wood - 1.75m
Michael Courcier - 1.3m
Maingould - 0.5m
2002
Gross Fine - 13.2m
DOR - 4m
2004
Berkeley Simmons Davies - 1m
Total = 57.275m
The one take over that sticks out for me is Gross Fine for 13.2m, as it had turnover of 3m and profits of 0.8m, but was landing some big contracts at the time - still it looks pricey.
FORECASTS
ERG - 3/06
Sales - 124m
EBIT - 26.5m
EPS - 17.88
DPS - 5.5
Share - £1.33
M’kt Cap. - 122.3m
Net Debt - 33m
P/E - 7.43
MTO -3/06
Sales - 830m
EBIT - 50.5m
EPS - 10.4
DPS - 3.2
Share - £1.37
M’kt Cap. - 421m
Net Debt - 2m
P/E - 13.2
MCHL - 3/06
Sales - 306m
EBIT - 23m
EPS - 14.8
DPS - 3
Share - £2.16
M’kt Cap. - 228.4m
Net Cash - +50m
P/E - 14.6
RPS - 12/05
Sales - 195m
EBIT - 27.15m
EPS - 10.62
DPS - 2.4
Share - £1.38
M’kt Cap. - 266.5m
Net Debt - 3.5m
P/E - 12.99
WSH - 12/05
Sales - 330m
EBIT - 16.5
EPS - 17.9
DPS - 5.8
Share - £2.19
M’kt Cap. - 132m
Net Debt - 48.7m
P/E - 12.23
Please note this info is mainly historical and fast changing because of the Hercules dynamics!
Just now they are taking over Hercules Property Services and the new ERG will move into the Small Cap Index in December.
Below is some data I have compiled on this stock and I hope it is of interest to you.
ERINACEOUS GROUP PLC (ERG)
Floated on AIM, November 2003, it is a one-stop shop for property services in the public and private sectors. There are three main divisions:
1. PROPERTY SERVICES DIVISION - HAYWARDS PROPERTY SERVICES
Comprised of four sub-divisions: Public Sector Housing, Residential Management, Building Consultancy and Facilities Management.
2. RESIDENTIAL LETTINGS DIVISION - HANOVER PARK SERVICES
The market leading provider of tenant referencing, rent guarantees, insurance and software solutions to 8,400 lettings agents and 3,200 registered brokers/IFAs.
3. INSURANCE DIVISION - HANOVER PARK COMMERCIAL
Provides policies for Haywards, Hanover Park Services and selected niche markets.
FINANCIALS
2004 - actual
T/O - 42.2m
PBT - 6m
EPS - 9.8
DPS - 1.75
2005 - forecast
T/O - 67.2m
PBT - 8.4m
EPS - 13.5
DPS - 4.5
2006 - forecast
T/O - 78.9m
PBT - 10.6m
EPS - 16.6
DPS - 5.5
SUMMARY
An ambitious group, operating in growing markets, that are fragmented and ripe for consolidation. Profit lines are visible, long term and recurring.
UPSIDE
EPS Growth Forecast - 2005 = 38%, 2006 = 23%.
Forward P/E of 10.5 at £1.42 per share.
DOWNSIDE
Management - over reaches.
ISG Occupancy - integration goes pear shaped
‘A company’s chosen strategies - for product quality, technology, vertical integration, cost position, service, pricing, brand identification, and distribution channel focus - drive its performance and competitive position. A company’s strategic choices, in combination with its skills in executing them, determine its prospects for creating value.’
A. Rappaport and M.J. Mauboussin from the book Expectations Investing.
After visiting the HQ in Croydon and being briefed by Neil Bellis for two hours, I confidently state that ERG are totally focused on, professionally, driving and executing the strategies articulated by Rappaport and Mauboussin.
The following is an outline of some key points accumulated from the meeting and published material:
Residential Lettings Division
They process 1,000 tenant references per working day at £20 a pop. Growing to 2,000 per working day, which will happen this financial year, means a lot of profit dropping straight to the bottom line - due to technology infrastructure and system productivity.
The two joint managing directors complement each other - one is strong on technology, the other marketing. They are of boardroom calibre.
There are no plans to make takeovers, growth will be organic.
The additional fifteen sales people have been intensely trained, one has dropped out.
Jordans - the plan is to franchise; with a top notch management team in place.
Property Services Division
The public sector division which has the Westminster Council contract will get orders but they will be lumpy in coming. When landed they will be long-term and profitable. For instance Croydon Council are looking to outsource their property requirements and ERG are now able to offer a one stop shop for the residential and office requirements. The current order book stands at more than £200 million for this division.
ISG Occupancy cost ISG Interiors £27m to assemble and ERG bought it for £10m, with 50% of future payments on the outstanding £6.6m able to be made in shares.
With the ISG Occupancy takeover ERG now has the opportunity to expand it’s service offering outside the South East of England, with offices in Bradford, Bristol and Manchester.
Productivity as a Competitive Advantage
ERG has a clear focus on using productivity to be cost-efficient, drive sales capacity and invest capital profitably. Utilising people, property and technology; such as teleconferencing, document imaging and computer software.
The new HQ in Croydon is a sleek set-up which will act as the nerve centre to steer the divisions effectively.
Neil Bellis
A youthful 50 year old, with bags of charm and the skill of explaining complicated processes in a clear insightful manner. Not anxious or hurried, he is a grounded and centred man, who connects with people immediately. Optimistic, yet this is tempered with realism when explaining ERG’s business opportunities. He is a winner who oozes ambition.
Goals
ERG has a goal to become a FTSE250 stock. They could either do this in two or ten years. Two years would be by further acquisitions, probably using paper - if rated higher by the market. Ten years would be by organic growth.
Share Price
ERG had expected the share price to be around £1.80 by now and realise they must build a deeper rapport with the City. ERG is presenting to the City and I expect they will lock-in some business minded investors.
Dividend
ERG is managed by people who own a large chunk of shares and they plan an aggressive dividend policy, as it is part of their remuneration.
Management Incentives
They are growing this business as entrepreneurial owners not as executives. The main board directors and operating-unit executives are heavily incentivised to deliver. Middle managers and frontline employees are well paid.
Profit Drivers - 2005 Forecast
Residential lettings - 5.3m
Haywards - 4.2m
Insurance - 1.5m
HQ Cost - minus - 2.3m
Interest Charge - minus - 0.3m
Profit before Tax - 8.4m
Beating Expectations
2005 EPS of 13.5 and DPS of 4.5 are forecast. Neil mentioned Mears and it’s history of beating expectations. ERG’s 2004 earnings surpassed expectations and I expect ERG to the follow the Mears policy.
City Living
The City’s understanding of ERG is gradually building. The buy-to-let connection is a perceptual hindrance, as is the acquisition strategy for growth. It will either take a big Haywards contract or December’s interims for the City to awaken further to the ERG business model.
Taken Over
ERG would accept £3.00 per share, as of 26/8/04.
Dangers
Neil thinks the main danger to stop ERG delivering would be management execution; he has his eye on this!
ISG Occupancy integration goes pear shaped.
Management over reaches.
Summary
Profit lines are visible, long term and recurring.
Balance sheet is finely calibrated.
Will they succeed?
Rappaport and Mauboussin succinctly state it best:
‘The probability of this outcome depends on management’s vision and execution skills - as well as on top management’s ability to convince the market that the company has a sound business model that deserves a higher stock price.’
HPS Takeover Musings - 28/29 September
2005 - March
T/O - 100m
ERG - 12 mths. - 9m ebit
HPS - 9 mths. - 9m ebit
Ebit - 18m
Interest - 3m
Tax - 4.5m
Profit - 10.5m
DPS - 4.5
EPS fully diluted 100.6m shares - 10.4
EPS fully diluted 106.6m shares - 9.84
2006 - March
T/O - 124m
ERG - 11m ebit
HPS - 13m ebit
Cost Savings - 2.5m ebit
Ebit - 26.5m
Interest - 3m
Tax - 7.05m
Profit - 16.45m
DPS - 5.5
EPS fully diluted 100.6m shares - 16.35
EPS fully diluted 106.6m shares - 15.43
I base the EPS on 89m shares in issue and options of 11.6m making a total of 100.6m shares fully diluted.
I base the EPS on 95m shares in issue and options of 11.6m making a total of 106.6m shares fully diluted.
89m x £1.20 = 106.8m market cap. plus 11.6m options
95m x £1.20 = 114m market cap. plus 11.6m options
Net Debt - 33m
The way I see it is that ERG are basically at the same place as before the takeover but that now they will go into the Small Cap. Index and have the opportunity to sell themselves to the fund managers who will ultimately get the share price up.
Groupama dumped them so they lost their underwriters.
September 11th caused premiums to rocket whilst Groupama was ditching them and they lost clients and margins got compressed. They now use Munich Re.
Also from what I can see they bought lots of companies but didn't integrate them under specific brand names, with central management. Too many sub-divisions. They are putting this right now, hence some divisional profits are down for 2004.
The main brands now are:
Cadogan Insurance
Farr Insurance
Dunlop Heywood Lorenz
Wood Management
Gross Fine
Harman Healy
It will be interesting to see which ones will be re-branded Haywards.
After this ERG will still have three main divisions:
Property Services
Residential Lettings
Insurance
Shareholders will now have to wait and see if Neil Bellis can sell the company to the Small Cap. fund managers.
But on a forward p/e of 7.2 for 2006 and a DPS of 5.5p it looks good value!
At the moment I can see only two possible counter bidders - MITIE and Mouchel Parkman.
Before the takeover ERG was valued at 63m for 11m ebit in 2006. Now the new ERG is valued at 104m (at £1.20) for 25.5m ebit in 2006.
I think the balance sheet is fine and that is why ERG only offered 10m, as it didn't want too much bank debt.
I think after this deal ERG will build to get into the FTSE250 in 2006 - probably by using deferred debt when taking over any new companies - I don't see them doing another big paper deal like this.
The cash flow of the new ERG will be very strong and debt I think will be paid down swiftly.
So at the moment the new ERG is valued at around 100m, to get into the FTSE250 you need to be around 300m. So if they do the integration well and the profit lines keep humming and Neil Bellis impresses the fund managers the share price could be £3.60 in 2006.
Takeover History
At the beginning of 2000 HPS comprised:
Deacon
Dunlop Heywood
Harman Healy - commercial
DGA
Simmonds Partners
2000
Farr - 20m
2001
Baker Lorenz - 5.75m
Cadogan - 4.8m
Kounnis Brokers - 5m
Wood - 1.75m
Michael Courcier - 1.3m
Maingould - 0.5m
2002
Gross Fine - 13.2m
DOR - 4m
2004
Berkeley Simmons Davies - 1m
Total = 57.275m
The one take over that sticks out for me is Gross Fine for 13.2m, as it had turnover of 3m and profits of 0.8m, but was landing some big contracts at the time - still it looks pricey.
FORECASTS
ERG - 3/06
Sales - 124m
EBIT - 26.5m
EPS - 17.88
DPS - 5.5
Share - £1.33
M’kt Cap. - 122.3m
Net Debt - 33m
P/E - 7.43
MTO -3/06
Sales - 830m
EBIT - 50.5m
EPS - 10.4
DPS - 3.2
Share - £1.37
M’kt Cap. - 421m
Net Debt - 2m
P/E - 13.2
MCHL - 3/06
Sales - 306m
EBIT - 23m
EPS - 14.8
DPS - 3
Share - £2.16
M’kt Cap. - 228.4m
Net Cash - +50m
P/E - 14.6
RPS - 12/05
Sales - 195m
EBIT - 27.15m
EPS - 10.62
DPS - 2.4
Share - £1.38
M’kt Cap. - 266.5m
Net Debt - 3.5m
P/E - 12.99
WSH - 12/05
Sales - 330m
EBIT - 16.5
EPS - 17.9
DPS - 5.8
Share - £2.19
M’kt Cap. - 132m
Net Debt - 48.7m
P/E - 12.23
Please note this info is mainly historical and fast changing because of the Hercules dynamics!
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