Smaller Companies: All aboard for Henly's loyalty rights issue

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The Independent Online
INVESTORS in Henly's have been handsomely rewarded for their loyalty 18 months ago in helping the company to survive an acrimonious pounds 32m takeover fight with T Cowie, the larger rival motor group.

Not only have they seen the value of their shares rise more than fivefold to 352p, but they have enjoyed a big increase in dividends. The yield is nearly 2.7 per cent for 1994, assuming a 7.5p payout.

The question they now face is: should they extend another vote of loyalty to the management by taking up the one-for-four rights at 280p a share announced on Friday?

Despite the wide 72p difference with broker's quotations, the theoretical ex-rights price, after stripping out the dividend, is 336p - just a 4.5 per cent discount to the market price. The p/e - based on the ex- rights price - is 17, assuming that Henly's matches forecasts and makes taxable profits of pounds 11.5m in 1994, translating to earnings per share of 19.5p. Taking that and the likely yield, the rights shares look far from bargain basement material.

And the rights issue looks even more expensive on forecasts of profits of pounds 12.5m in 1995. With the tax charge set to rise as the company runs out of credits on past losses, those numbers give earnings of 18.5p.

But making a decision on such basic mathematics would be akin to short-termism. Investors should concentrate more on the company's ambitious programme to increase its number of dealerships by about one-third over the next four years.

With a few acquisitions and a stronger-than-expected recovery in the coach market, Henly's could turn in profits of, say, pounds 15m in 1995 - equal to 22.2p of earnings.

And given the company's progressive approach to dividends, shareholders could see another big increase in payments next year.

It would be churlish to think that Henly's is not ready to brandish the cheque book on buying single and even small groups of dealerships.

Any acquisitions would slot neatly into a broad spectrum of 15 different types of dealership - 12 car and three truck and van.

They would ease the pressure from an after-sales market in servicing and spares that is stagnating. After-sales yielded 60 per cent of the motor division's operating profits last year.

The rights issue, underwritten by Charterhouse Bank, injects pounds 10m into Henly's bank account and takes gearing down from 32 per cent to just 1.1 per cent of pro forma shareholders' funds of pounds 75.8m.

Henly's has had to work hard with very little luck to turn around from heavy losses to respectable levels of profitability. But if the rumour is true that two big coach operators are about to come to market to raise growth funds, Henly's could reap an unexpected windfall.

The average age of coaches on Britain's roads is approaching 15 years, and they are becoming very uneconomic to run because of frequent breakdowns. They will have to be replaced at some time, and lower interest rates could tempt some of the more highly geared operators to replenish their fleets through leasing or hire purchase.

Even without such a boost, Henly's still deserves the loyalty of its shareholders, who should subscribe to the rights.