09/10/2006
Recruitment outfit Hat Pin used to be regarded as a rather quaint if inconsistent AIM performer, renowned for the cyclical volatility that usually attaches itself to businesses focused on the notoriously volatile and fickle advertising industry.
Not so now. Over the past year, under a strengthened management team led by Angela Campbell-Noe, the company has been transformed both internally and through acquisitions that have diversified the business into a greater number of specialist growth markets. Three key deals have enhanced earnings quality and greatly de-risked the business, with the most recent, Akamai, announced last month.
Now Hat Pin’s premium brands sport healthy margins, underpinning the investment case, and recent financials have been very strong, with profits and other key metrics moving in the right direction. Despite all this the shares, which peaked at 89.5p earlier this year, remain significantly undervalued compared with sector rivals, despite Hat Pin’s superior growth prospects.
Strategy
Hat Pin’s strategy is simple, explains chief executive Angela Campbell-Noe: ‘We want to invest in the businesses we already own. And on top of that, our strategy is to build a portfolio of businesses that diversify our revenue streams on both a sector and a geographical basis. My strategic vision is to keep increasing our size and scale, and we have made great strides in changing our shareholder base – we now have some institutions in the stock.’
So far, the execution of this vision has worked well. Hat Pin now operates through two brands, Kendall Tarrant Worldwide and SBH, in which it bought a 70 per cent stake in December 2005. KTW is a large advertising recruitment operation with a good reputation in advertising and communications, with offices as far afield as London, New York, San Francisco and Hong Kong.
SBH focuses on the executive search industry, plying its trade within senior media, technology and professional services, as well as the public and not-for-profit sectors, where it acts as an adviser on senior appointments in higher education, Government, charities and the arts.
Alongside recent half-time figures, Hat Pin announced the acquisition of a third leading business, the financial markets executive search business of Alexander Mann, now re-branded Akamai. Fast-growing and high-margin, Akamai operates in the UK and Hong Kong financial services market and has expertise in global capital markets, investment banking and insurance.
A potential win-win on a number of fronts, the deal should enhance 2007 earnings, drive further increases in operating margins and diversify the top line via its exposure to the buoyant financial services industries in the UK and Far East.
‘Akamai is an acquisition that gives us a third leg,’ enthuses Campbell-Noe, ‘and with my financial services background, I fully understand the sector and the opportunities this acquisition could bring.’ She also gives a nod in the direction of further deals. ‘At the moment, we are almost 100 per cent permanent, so we might look to bring in a bit of temporary.’
Management
Campbell-Noe has proved the driving force behind Hat Pin’s revitalisation, pushing on with organic and acquisition-led growth and creating greater awareness of the group in City circles. She joined Goldman Sachs out of Oxford University where she studied law. She then headed the food and drink practice at Baring Brothers and more recently led the luxury goods and personal care franchise for Deutsche Bank, before boarding the Hat Pin ship in early 2004.
Adding some serious gravitas to the board is Collins Stewart co-founder and former director Terry Hitchcock, who occupies the non-executive chair. Hitchcock, appointed just over a year ago, has vast experience in the quoted company arena.
Running the rule over Hat Pin’s improving numbers is erstwhile PricewaterhouseCoopers man Paul Billett. Before joining Hat Pin, he was finance director at AIM-listed Dynamic Commercial Finance, which he joined in late 2003. Another notable is executive director Stephen Bampfylde, the chairman and co-founder of SBH, and a founder of The Amrop Hever Group, an international network of executive search firms.
Prospects
For the optimistic, Hat Pin’s prospects look rosier than ever. Investors need look no further than the 2005 figures, which showed turnover lifted 22 per cent and profits increased £786,000 (£522,000). More recent figures for the half to June, featuring notable contributions from SBH and Stolkin & Partners, an add-on acquisition in March merged with Kendall Tarrant, were awash with highlights.
There was 148 per cent growth at the top line to £6.2 million, with acquisitions giving a shot in the arm to revenues and good rates of organic growth reported. Sales at KTW rose an impressive 35.2 per cent, buoyed by healthy growth in the US and Hong Kong, as well as in London, where revenues sparked 41 per cent higher. Pre-tax profits powered 130 per cent higher to £768,000, sending earnings up 30 per cent to 2.7p.
The £7 million acquisition Akamai, financed with a £5.5 million placing and completed on an attractive multiple of 3.5 times EBIT, boosts the quality of overall earnings. It has a clutch of worldwide banks (including HSBC and Deutsche Bank) as clients, which enhances Hat Pin’s overall standing in the market.
Management’s strict acquisition criteria should also ensure that future deals only add value. Target brands must have strong reputations and high margins, and operate in markets with high entry barriers. They have to be profitable, cash generative, debt free, and able to flatter earnings in year one. Turn-around situations are out.
Valuation
This year, the market is expecting profits of £1.9 million and 5.9p of earnings from turnover of £14.5 million. The following year, sales approaching £22 million are on the cards (without any further acquisitions), which could translate into pre-tax profits of £3.5 million and earnings of 9p. At the current price, the shares are changing hands for an undemanding forward multiple of 13, a figure that drops to a rather budget looking 8.5 times for 2007. Now, given that earnings are forecast to vault 40 per cent in 2006 and 53 per cent next year – giving lowly PEG ratios of just 0.3 and 0.16 – the shares should surely command a far higher rating.
Throw in forecast dividend payments of 1.2p and 1.3p and yields for the next few years are also respectable. All of these numbers naturally exclude future acquisitive moves and the current £12.1 million market capitalisation gives a price-to-sales ratio of only 0.55, based on forecast sales of £22 million next year.
Hat Pin, in which canny small companies player Bob Morton has an interest, is trading at a discount to many quoted peers, despite its superior growth prospects, and presents a strong buying opportunity.
| AIM | £10.66m |
34.25p
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0.00p
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