Shares in marketing group NAHL (LON:NAH) fell 15% this morning as a slowdown in the residential property market has led to a downgrade in full year expectations. The share price fall was roughly in line with the downgrade:
It should be noted that a similar profit warning was put out in January this year (which this site missed) and the 2018 results were below expectations by a similar amount (5-10%). At this point the shares almost touched 75p, so there has been a strong recovery in the share price in the past year. Despite this latest warning, the shares still sit much above the lows seen of this year, and investors have seen a dividend since.
The story may be a little different for longer-term holders. Since coming onto the market in 2014 at 200p, the share price doubled in under two years to surpass the 400p region in late 2015. But since then, it’s been a mostly downhill ride, with sporadic bounces in the price being snuffed out by further profit warnings. In common with many companies issuing these warnings the price is at a fraction of the high.
NAHL are certainly an interesting company and may have greater exposure than originally thought, especially in the UK. They operate the ‘National Accident Helpline’ but do not provide any legal services themselves, but instead receive a commission for passing on these hot leads. In effect, a more official version of a company such as XLMedia. Since then, they have expanded their business via acquisitions into Critical Care and Residential Property.
What’s gone wrong at NAHL Group?
The second warning inside of a year comes courtesy of a trading update this morning. First of all, some transition news:
The Group has today reached an agreement to terminate its relationship in respect of NLP, with effect from 2 January 2020.
As part of this agreement the Group will receive £5m over the next three years in payment for historic panel enquiries while registering a one-off provision amounting to £1.16m in the current financial year. This settlement avoids a protracted dispute and the prospect of complex and time-consuming litigation between the parties.
This perhaps is no surprise: the Group created its own wholly-owned law firm, meaning no need for a joint venture.
Underlying trading in the Personal Injury division is expected to perform marginally ahead of Board expectations and Critical Care remains on target. However, in the second half of 2019, the residential property market has deteriorated further and we now expect the division to make a modest loss in 2019. As a result, excluding the aforementioned provision, underlying earnings* for the year are now anticipated to be between 5% and 10% below Board expectations. Despite this, the Group anticipates full year net debt to be broadly in line with plan.
This is a familiar tale: the residential property market was the cause of woe last time. Reduced transactions here for a variety of reasons have understandably led to a loss of business here. We can reconcile the effect from the accounts: the Residential segment accounted for just £728,000 of the £11.8m underlying profits last time around, with this slipping to a loss the effect will be in-line with this prediction, depending on the interpretation of ‘modest’.
NAHL: A company at the crossroads?
At a first glance, NAHL looks like a bit of a cash cow, there has been a consistent level of profitability here. That comes as no surprise: their marketing format is tried and trusted and the trend of accidents per year is likely to be pretty stable. The headline figures from Stockopedia pretty much paint a picture:
We can see that revenues have pretty much stayed flat for the six years we can see here. As a result, operating margins have slipped. We can imagine that there may be several reasons behind this, from increased competition (resulting in lower referral fees), to legislation making the more frivolous claims of injury (ie. whiplash) more difficult. However, the projected profits beyond this show a large leap: perhaps being tied into the launch of the wholly-owned law firm. This type of vertical integration may prove to be very powerful, as the Group then profits from the entirety of a claim, instead of part of it.
With these figures we may presume that the business is in rude financial health, but this is not the case. Since IPO the business has paid out all its profits as dividends:
Real cash generation has also lagged way behind the profits:
This has led to a consistent trend of the debt level increasing: from a net cash position of over £7m it has declined every year, and it is forecast from a broker report (available in Research Tree) that net debt will peak this December at £20m. That is some decline in a short period of time.
This trend is also captured by Stockopedia in the balance sheet:
Accounts receivables have exploded upwards by an incredible factor, considering that turnover has stayed roughly stable. The rise is sharp this year: accrued income has almost doubled. This on its own could be considered a red flag, as this income can be declared as profit without the cash being received. A mitigating factor in this case is that given the average complexity of case has increased here over the years (thanks to acquisitions into other sectors), the timescales for settlement also have as well.
The balance sheet is now less than ideal: net tangible assets are negative (although unexpected for this type of firm). Working capital ratios are strong but with much of the current assets now being receivables and accrued income as opposed to cash this sits on more shaky ground.
Are NAHL shares good value?
If we are to believe the profit forecasts, the shares are cheap on an earnings multiple, doubly so if we can believe the the new law firm will improve margins and further increase performance in an area where the company is strong, albeit where competition is high and barriers to entry small.
Diversifying the business makes a lot of sense in the current environment: the prospects of regulatory change will hang over the personal injury claims sector perhaps forever. And the company is very heavily exposed to this area with half of its revenues (and most of its profits) being derived from it.
There has been a handsome dividends here over the years which seems to have underpinned the share price. But this seems to me to be in danger. The first reason being in the past two years dividends have been greater than cash flow, and as a result debt has increased. From the last accounts the revolving cash flow facility had a limit of £25m and there is not too much room currently. The second is that the dividend is unsurprisingly a large expense for the company and that money may be put to better use by investing in its current divisions.
To me, risk and reward are finely balanced. If the new venture can perform well the upside looks very nice here, but the weaker balance sheet at present introduces some real risks to equity and the possibility of an event that may lead to dilution in the future. 3/5.