As a rule of thumb, I avoid companies with ‘buy and build’ strategies. This is because those that are addicted to acquisitions tend to spend like drunken sailors – in turn destroying shareholder value. There are lots of ways for deals to go wrong – companies can overpay; expected sales synergies may fail to material-ise; cost savings can take twice as long to deliver as promised; or the board simply buys a pup.
Hampson fell into this trap when it made an all-or-nothing bet back in June 2008. It bought two US aerospace tooling firms (Odyssey and GTS) for $253m. The deal was hailed as transformational, yet since then the shares have crashed.
But that’s all in the past now. The new CEO, Norman Jordan, is determined to lift profit margins, cut the £89m of net debt and expand organically. Better yet, the tailwinds behind the stock are strengthening. The US composite tooling market is worth about $1.6bn and is expected to grow at 11% a year. Hampson services around a tenth of this market. No other player represents more than 5%.
As a result, Hampson is ideally placed to snap up a flock of new, composite-rich aircraft programmes (Boeing’s 787, Airbus’s A350 and the F-35 Joint Strike Fighter). For example, in September a $53m contract was bagged with Boeing, a marvellous endorsement of Hampson. Moreover, at the last count the backlog stood at £133m, £111m of which is due for delivery within the next 12 months.
Hampson Industries (LSE: HAMP)
So far so good, but what are the risks? Along with the turnaround plan, the other main challenges facing the business include dependency on Boeing, rising raw-material costs, delays or cuts in US military spending, foreign-exchange fluctuations, and a lawsuit alleging false misrepresentations with regard to a past disposal.
With regards to the figures, house broker Investec predicts sales and underlying EBITDA of £188.9m and £24.8m respectively for the year to March 2011, and £193.5 and £28.9m next. I’d value Hampson on a ten-times 2011/2012 EBITDA multiple. Discounting back at 12% and adjusting for the debt, that generates an intrinsic worth of 60p a share. A takeover bid is also not out of the question (by GKN Aerospace, for example), especially given 87% of sales are in America.
Recommendation: SPECULATIVE BUY at 32p (market cap £89m)