International net-net #1 Hyrican Informationssystems AG

Hyrican Informationssystems AG 

Frankfurt Exchange: HYI €4.59 as of 3/27/11

I have started digging through the list of net-net stocks I identified in the previous post.  At first I was very excited because 246 stocks is a good amount to dig through, but once I started to dig I kept hitting a lot of crap.  It seems some of the shares are closed end funds trading at a discount, others are small companies that are darn near impossible to get information on without calling and asking for an annual report.  I finally found an interesting company, and it's worth a blog post.

Summary:

Hyrican Informationsystems is a computer reseller who's name translated into English is MESH information systems.  Hyrican specializes in business PCs, CAD workstations, and a few laptop models.  They sell Microsoft software as a reseller as well as an internet filter product and multimedia protector product.  Unfortunately they don't break out sales per product, so we don't have much visibility into what drives their earnings.  

The company is very small, they currently have a market cap of €18m and have had decreasing sales since 2008.  To combat the decreasing revenue they've improved internal efficiency so their profit hasn't experienced the same drop off, this has included a drastic employee reduction as well.

This is the sort of net-net I like to find, a business that has some solid warts but is profitable and has great cash flow.  The business appears to be managed conservatively holding more than it's market cap in cash.  

What's very difficult with evaluating Hyrican is the information flow is very very low.  They released summary numbers for the 2010 fiscal year but not much more than revenue, EBIT and net income.  For my valuation I'm going to use the 2010 interim report for the balance sheet figures, and income figures from the latest reports.  From the 2009 annual report to the 2010 interim report inventories and receivables have stayed relatively stable while the cash balance has dropped about 10%.

Pros

-Positive retained earnings, the company is consistently profitable.

-The company made cuts to remain profitable even with the decline in sales.

-Positive cash flow

-Not a capital intensive business

-The shares are cheap!

-€.22 per share dividend a year, a 4.8% yield currently.

Cons

-The business has taken a strong hit from the recession and still hasn't recovered.

-Business IT spending in Germany hasn't recovered as quickly as expected.

-The company is a reseller for a few brands not a general IT supermarket, so they sell CAD workstations and standard PCs they don't offer any tablets or servers where growth in the IT market is.

-A strengthening dollar will increase component costs and reduce profits.

-Terribly illiquid, average volume is 150 share or €688 a day in volume, building up a position could be difficult.

Valuation

-€5.06 cash per share

-€5.38 NWCC (net working capital, discounts receivables and inventory)

-€5.85 in NCAV

All of the above could be considered towards a liquidation value, but in Hyrican's case they're not a company winding down towards liquidation, they are profitable.

-EBIT €1.3m (down from €2.0m 2009)

-NI €953k (down from €1.46) 

-EPS of €.238

If we place a EV/EBIT multiple of 8 on the shares we get a value of €10.4m for the value of the business plus the €20m in cash for a €30.4 value or €7.6 per share.

Even if we assume cash declined 10% YoY to €18m (4.5 per share) and we back that out of the share price the shares are trading at a P/E of .39 and still a negative EV/EBIT.

Summary

This is not a great business but that's also the reason the price is depressed.  The shares are unquestionably cheap, the question is at the current price is there enough of a margin of safety to invest.  The way I like to consider a margin of safety is to think like a creditor.  Would I loan Hyrican money if I had the ability?  Based on what I've seen I probably would except I'd toss in a covenant against the dividends, but without any debt, and with a large cash cushion paying out most of their earnings as a dividend isn't too much of a worry.

2010 Interim report
2010 Summary results

Disclosure: I don't currently hold a position, but I might try to initiate one over the next few days.