Haynes Publishing Group – AGM Report #HYNS

Haynes Publishing Group – AGM Report #HYNS

Haynes Publishing Group (#HYNS) – Latest share price: 326p, market cap £49.3m

On Wednesday, I was pleased to attend the 59th Annual General Meeting (AGM) for my long-standing portfolio constituent Haynes Publishing Group. Readers will recall I previously wrote about the virtues of attending AGMs back in June 2019.

Having only covered progress at the Haynes Group last month, I won’t wax lyrical about what a great business it is and will just get straight into the outcome of the meeting; principally the Q&A session with the management team.

The meeting was well attended as always, both from the Haynes Group (Board plus senior managers) but also from shareholders.

Let’s get stuck in:

Actually, before I start I want to caveat the Q&A session below by stating that neither the questions asked nor the answers provided by the management team as shown below are verbatim; rather this is my recollection of the various discussions pieced together. Any errors or omissions are entirely of my own making. The questions are also in no particular order of importance.

Question List

  1. Product development spending
  2. Panmure forecasts
  3. Auditor fees
  4. Impact of electric vehicles
  5. Geographic expansion of professional segment
  6. Geogrphical split of subscribers
  7. Competitive landscape
  8. Pension deficit
  9. Strategic acquisition

Question 1

The Annual Report (p.12) confirms that just under 1/3rd of the £8.7 million spent last year on product development (for global content) was directed to the ‘Consumer’ segment of the business yet only circa 14% of adjusted operating profit (excl. unallocated costs) came from the Consumer segment; OP contributions from this segment also being in decline (£1.12 million vs £1.75 million in 2018). How does the Board determine the balance of Product Development expenditure between the professional and consumer segments given the above?

Answer

In the past, when the Group produced an automotive manual in print form, the customer was the retailer and accordingly we had no interaction with the actual end user.

Now that we produce most manuals in print and digital format we get customer insights from the digital content to inform decision making. For example, as we now sell directly to the end customer we know who they are, what car(s) they are likely interested in and what content they are specifically looking at within the digital manual i.e. let’s says it’s how to replace the air filter. This is useful data that can be monitised.

Alongside this we have our professional VRM data that provides vehicle registration information, MOT information and the registered postcode of the vehicle. Our partners such as Halfords etc have further insights about their customers in their own data and the combination is very powerful for our partners including the likes of parts distributers.

Some of the consultancy work we do is interesting. For example, let’s say one of our customers like ATS were looking to build a new fast fit centre in a certain location around a town/city. Our data can tell them which vehicles (and how many) are registered within the catchment area for that proposed location and hence ATS can make decisions on the ideal location for their premises to maximise customer coverage as well as stock parts for those vehicles known to be in that catchment. It’s very powerful data for our customers and there is more cross-pollination between the consumer and professional data i.e. B2B that perhaps you might imagine.

Question 2

House Broker Panmure issued an updated research note on 12th September 2019 detailing significant earnings (EPS) upgrades for the Group namely:

  • 34% upgrade to previous FY 2020 numbers
  • 59% upgrade to previous FY 2021 numbers
  • Introduction of FY2022 numbers showing 22% further growth in EPS

The note also states that potentially they will be “looking at making some large upgrades again” if FY20 goes as well as anticipated and it shows a progressive dividend again after 6 years.

This is all very positive but can you add your perspective as to the inflexion point causing Panmure to now be so bullish on future prospects for the Group?

Answer

It’s number of things namely:

  1. We are now splitting out ‘Consumer’ from ‘Professional’ in our financial reporting so investors can clearly see the growth being achieved via our professional segment (and the margins)
  2. Over 56% of sales (and growing) are from digital – crossing 50% was an important milestone.
  3. We are generating year-on-year improvement in recurring revenue and from longer term contracts
  4. Our ongoing sizable development expenditure over recent years in both the consumer and professional segments is starting to pay back

Panmure also believe that the multiples previously being applied to the business by the market do not reflect the fact we are now primarily a data business and growing strongly.

Question 3

The Annual Report (p.69) shows auditor fees up 20.6% since 2018 – can you elaborate on the large year-on-year increase?

Answer

This primarily relates to the fact that the auditor had to undertake a full audit of E3 Technical post acquisition during FY2019 and hence there was a larger scope than 2018. That said we are very mindful of general cost increases!

Question 4

The ‘FAQ’ section of the Group website (“Investors”) provides some brief narrative about the potential impact on the Group from Electric Vehicles (EVs) but it’s light on detail. It’s evident that EVs have less OEM parts that traditional petrol/diesel vehicles so my expectation is that whilst the growth of EV’s won’t be materially detrimental to the Group, certainly over the short term, it will have some negative impact – can the Board quantify what they believe this impact may be over a 5-10 year period?

Answer

You are right that EVs have less moving parts and less demand for lubricant data but equally they have far greater requirements for electrical diagnostics as served by our VESA™ module and we anticipate that market demand for VESA™ will increase in-line with EV growth. We do monitor the market and currently EVs are still a very small proportion of vehicles on the road (China has far greater numbers than the West).

Also in the future, it’s likely that car ownership will change with cars being owned by corporations, fully connected and autonomous. This puts the onus for maintenance of the vehicles with the corporation(s) rather than with individuals as is currently the case, and hence whilst service intervals for EVs may be longer than with petrol/diesel cars we anticipate demand for our data to grow due such changes in car ownership. It’s not something that keeps us awake at night.

Question 5

The Group recently launched their WorkshopData™ module into the Australian market, the first expansion of this professional platform outside Europe. Can the Board elaborate on their plans for geographic expansion of the professional segment and which new geographies are seen as key target markets?

Answer

Asia Pacific is one such area. China is potentially a huge market but there are known challenges with trying to directly enter that market. Our approach is via partnering with our existing customers i.e. the like of SnapOn and Autel where they already have the local market data and know what their customers want in these geographies and/or where they see growth opportunities. As our data feeds into their product offerings we are growing with them without the risks of directly approaching those markets ourselves.

There is also still room for growth in Europe where HaynesPro already are market leaders. Our partners are telling us there is ongoing demand for automotive data and we can take further market share there.

Question 6

The Group now has 60,000 Online Manual subscribers – can the Board confirm the geographical split of these subscribers and which geographies are seeing the most growth?

Answer

Around 2/3rds are US customers with the remaining 1/3rd being primarily UK based. We also have a number of Haynes ‘AllAccess’ customers that include technical collages/universities and automotive repair shops where they want full access to the complete range of digital automotive manuals.

Question 7

Can the Board elaborate on the competitive landscape in the UK for the professional segment given major competitor Autodata’s known long-standing foothold in the UK:

  • Are Haynes actively having to compete with Autodata?
  • Is the UK a target growth market for the professional segment?

Answer

Yes, Autodata are a competitor but our approach is slightly different to them i.e. we focus on partnerships with diagnostic equipment manufacturers, the oil and lubrication market and parts distributors etc whereas Autodata are more focused on the service/repair aftermarket.  We now have 37 staff in our Swindon ‘OATS’ office and further 50 staff in Maidstone (this being the original ‘E3 Technical’ team). Both of these acquisitions have given us a running start in the UK and we see plenty of scope for growth so ‘yes’ it is a target market.

There have been examples of 2 automotive businesses merging or being acquired by larger peer and where they have historically used more one data provider; the parent company wanting to consolidate and use just one provider (i.e. Haynes or Autodata).  To-date we have fared well in such circumstances.

We also want to try and access end customers early, for example university students in the automotive sector. If they have used HaynesPro whilst studying as we have a tie-up with the universities then we feel they are more likely to continue to use HaynesPro when they finish their studies and move into the job market.

Question 8

The pension deficit at just under £24 million is around 50% of the current mcap of the business and is therefore a significant consideration for investors in the Group. Can the Board confirm their understanding of the trustees approach to managing this deficit specifically future lump sum cash contributions from the Group and cautiously maximising the return on assets?

Answer

We have a very good relationship with the trustees and are comfortable that the deficit, whilst large, is in hand and being managed. As you will appreciate, the deficit is partly a function of historically low bond yields etc and our markets forecasts allow for cash contributions from the Group. The demographic of the pension scheme is also always evolving and the asset classes need to reflect that.

Question 9

The Group has stated it would be open to making a strategic acquisition in the future – what does the Board see as the highest priority between adding more depth to an existing offering, adding scale and/or adding new geographies?

Answer

It could be all or any of the above but primarily we are focused on organic growth and have plenty of runway for growth without making an acquisition. Of course we do look at potential acquisitions but it would need to be for a good reason. With OATS we had already worked alongside them for a number of years but it was only when the vendor wanted to sell due to retirement that we did a deal. The vendor also liked the Haynes brand and knew that we would be a good home for his business – this is also important to us.

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Further questions I had planned to ask about the status of the sale of the Sparkford HQ site (ongoing as I’m aware) and future headcount growth (up 12.5% in 2019 primarily due to the new HaynesPro office in Bucharest full of technical authors producing aggregated data) fell through the gaps but were secondary and can wait.

Summary

In summary, it was another informative AGM with the usual cordial chatter between attendees, buffet lunch and all within the backdrop of the superb Haynes Motor Museum* – a worthy attraction in its own right!

I anticipate the Group will continue to re-rate as management further execute on their plans to grow the professional segment and stabilise/leverage the consumer segment and I look forward to providing further coverage in January 2020 at the time of the interims.

 

*The Haynes Motor Museum is an Educational Charitable Trust founded in 1985 by the late John Haynes (founder of the Haynes Publishing Group) but has no others links to the Group.

 

At the time of publication, the author holds a long position in the company mentioned.

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COMMENTS

Wordpress (9)
  • comment-avatar

    Hi Simon

    I sat opposite you at agm lunch.Apart fr pension deficit everthing looking positive,keep up the good work.

    Edward

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    • comment-avatar

      Hi Edward.

      Yes, I believe you asked the initial question about the GMP? Sorry I didn’t get chance to talk to you – never enough time!

      As we know, the pension deficit is large relative to mcap but I came away assured by Richard and James comments that it’s all under control. One way or the other shareholders will have to make up the deficit unless bond yields hugely reverse which is unlikely. With the business growing very nicely generating increasing amounts of cash I’m not concerned and believe it will get managed. 

      I didn’t include any commentary in my report about the non-cash treatment of the GMP and associated adjustment to earnings but in retrospect should of done. I’m never a fan of adjustments but this is a one-off.

      If you have any further feedback from the AGM or have a different understanding of any of the points raised please let me know via this comments box. I had various conversations during the lunch and before and it’s sometimes tricky to recall every detail but hopefully it’s an accurate reflection.

      I believe the management team also read my articles so I would like to express my thanks to them as always for putting on a nice lunch for us all and sparing their time for our questions. 

  • comment-avatar

    I think you covered everything very thoroughly Simon.
    To reiterate from my own conversations with directors and management from all sides of the business ,we should see further good growth and cash generation this year,which bodes well for the ongoing re-rating of the share price.

  • comment-avatar

    Interesting news today 15/11/19regarding proposed sale of the whole business,always previously felt that J Haynes was committed to take business on from his father but?
    Very hard to judge what a good price would be, instinct says hang on to the shares ,if we get a few bidders involved price may surprise.

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  • comment-avatar

    Came across this report from the AGM today as I digested the news of the Haynes sale. It sounds like there was no indication at the AGM that this might be a possibility. It appears the share price has really climbed since September if you look through the number and value of shares traded over the last year. Bit sad to see this company being sold really. Some more thoughts here on my blog: https://riverotter.co.uk/2019/11/15/iconic-publisher-of-haynes-manuals-up-for-sale/ All the financials are in a healthy state it seems, although as you point out in relation to the AGM, the pension deficit could be an issue that gets raised in valuations. Anybody have any guesses as to what Haynes could be worth?

  • comment-avatar

    Hi RiverOtter

    Just seen you post as I had logged on funnily enough to put some brief thoughts down re:valuation.

    Firstly, I agree that other than the AGM being very upbeat there was no reason to believe such a Corporate Action may be likely. Anyway, back to valuation:

    PE of 20 (many growth stocks are currently priced at PE20/25+) based on 24.4p EPS forecasts = 488p

    £38m annual sales x 60% digital x 4 P/S (#FUTR is 7x) multiple = 600p area

    Sector average EV/EBITDA is around 10 implying 735p

    Price/Book is currently 2.7 compared to #FUTR which is 7 x Book.

    These are all pretty crude but anticipate a valuation of around 600p given the strong cash position, excellent underlying business and strong competitive advantage in this sector.

    Hopefully investors won’t have too long to wait.

    As normal, such news is fantastic on a short term basis but assuming it’s an all cash deal, it will leave a huge (20%+) hole in my portfolio that I will need to fill with a suitable replacement.

    All ideas welcome! 

    • comment-avatar

      Hi Simon, appreciated hearing your thoughts on valuation. I mentioned you in a followup post here: https://riverotter.co.uk/2019/11/26/haynes-publishing-going-going-gone/ I’m a bit uncomfortable about the pension deficit so slotted that into EV/EBITDA calculation, although I know that isn’t quite the way it should be done. Also came up with a few more comparison points in the publishing and media sector, which if anything should be more conservative than accounting for the company’s increasing digital services. Plus, I note an intriguing coincidence!

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  • comment-avatar

    Hi Simon
    Thankyou for your reasoning on potential valuations for the business.
    I definitely feel anything under 550p would be far too much of a gift to any PE buyer.

    As for your last paragraph, should probably still be raiding the piggy bank to buy more here as plenty of potential upside still here for the moment,as i’m not expecting a 20% plus return on the the rest of my portfolio in the next 6months or so!

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