Hill Hire geared for the long haul

A RECENT bout of weakness in the shares of the recently floated truck and trailer rental group, Hill Hire, taking them down to 110p, presents an opportunity for longer-term investors to acquire a stake at an attractive price.

There has been some softness in the truck rental market in recent months, but the trailer side, where the group has a significant exposure, has seen demand strengthen since June. Analyst Roger Brocklebank at stockbroker Albert E Sharp, upgraded his forecast from pounds 3.4m to pounds 3.6m after the interim figures; the company made pounds 2m in the year to 31 March.

On that forecast, though, the prospective price-earnings ratio, on a low tax charge, is just 10, which looks good value for a group with ambitious plans to grow from its regional base into a national operator.

There are a number of reasons for the recent bout of weakness that has taken the shares down from a peak 137p, against last December's 94p flotation price. A business rival, Dawsongroup, recently warned of a deterioration in market conditions. Dawsongroup, though, is much larger than Hill Hire, but its trailer operations are a much smaller part of the whole. Hill Hire shares are also following the established pattern for new issues, in which an initial price rise gives way to weakness as holders take profits. The group was a spin-off from a Yorkshire property group, Birkby, which specialises in renting out space for small commercial and retail operations. When the stag selling dries up, which may already have happened with the shares trading sideways since August, the price may be poised to rebound.

Last but not least as a short- term depressant is the overhang of Birkby's remaining 44 per cent holding. The expectation is that these shares will be sold under orderly marketing arrangements through the group's stockbrokers from end-December this year through to the announcement of the group's results for the year ending March 1997. As this stake is gradually placed in firm hands, Hill Hire should stop its drift, especially if sales and profits continue to grow as strongly.

Investors may be underestimating the group's potential because of a failure to realise the strength and experience of the management team. The assets of the Hill Hire business were purchased from the receivers of Hill Financial Services, in October 1990, by the current executive team, with backing from 3i. The deal was led by 50-year- old Jeffrey Chapman, who has worked in the truck and trailer hire industry for more than 20 years and who was one of the founders of CSL Truck and Trailer Hire in 1980. All the key executives came from CSL.

The new team consolidated all the group's operations at one site in Bradford, sharply raising both sales and profits. Then, in July 1993, additional funding was obtained by selling the fast-growing operation to Birkby. Further logic came from Birkby's desire to find a strong management team to manage its light commercial van rental business, Ember. The acquisition worked well, but Birkby went on to make further substantial property acquisitions, and realised Hill Hire's growth ambitions would best be met by spinning it off. A placing of new shares at flotation raised pounds 6.4m for Hill Hire while enabling Birkby to cash in part of its stake.

A chunk of the cash was used by Hill Hire in April to acquire Euro Trailer Rental from Berisford for around pounds 3.4m. The deal increased the group's trailer fleet from 1,180 to 1,819, with a further 71 trailers under management. It also added three sites in Manchester, Northampton and Glasgow.

A key feature underpinning growth has been the emphasis on service and tight controls of all aspects of the operations. Sites are large so that the group can stock a wide range of vehicles and also to permit 24-hour service operations. Net of acquisitions the fleet has grown from 350 to 2,400, showing the sort of organic growth the management team is capable of producing. The main centres for growth in the shorter term are sites at Castle Donnington, servicing the East Midlands, and Manchester. The latter is thought capable of becoming a 1,000-unit location, as part of a general target of taking the fleet total to 4,000 over the next two years without acquisitions.

The management has a strong incentive to make both business and shares perform, with the four key executives owning and having under option just over 400,000 shares each. On Albert E Sharp's forecast of earnings for 1995-96 reaching 11p, that makes the growth rate over the last two years 16 per cent in a less than brilliant economic environment. If they could keep that up through the rest of the 1990s, at current prices the p/e would head well into single figures, and the prospective dividend yield is 4 per cent plus. The shares look capable of performing well over the next two or three years.