After a slow reporting period through February, it appears that many companies are now beginning to quantify the effect of coronavirus on their operations. We saw yesterday how Hostelbookers saw a hit, today is the turn of Hyve (LON:HYVE) formerly ITE Group. The Hyve Group share price fell today by over 10% to new year lows on a new update:
Hyve, formerly ITE Group are somewhat of events specialists: they put on exhibitions and shows around the world. These shows are not for their own company, but rather others: to connect companies and customers. Trade shows and exhibitions clearly have many logistical challenges to overcome and it is in this space where Hyve have managed to insert themselves.
Hyve have been listed a long time under their previous ticker ITE, but their performance has been middling in the short-term and volatile over the long term. The shares gained a large boost after the general election result last year and todays profit warning has knocked the Hyve share price back around 6 months. In the longer term this is a business which hasn’t really gained traction for its shareholders. Performance has ebbed and flowed, with its fortunes tied to the economy.
What’s gone wrong at Hyve?
Given the unrelenting spread of the virus which is travelling to countries around the world and Hyve’s global exposure to events which necessitate people being close to one another, it may be interesting to hear what they made of it. They delivered that today in a ‘coronavirus update’. It begins in a understated way.
The events industry is experiencing significant disruption across multiple geographies and sectors with many events having been cancelled or postponed across Asia, Europe and the USA.
We then start to get more detail:
At Hyve, each region in which we operate has reacted differently and, in some instances, governments and authorities in impacted countries have placed certain restrictions on travel and on large gatherings to contain the spread of the virus, as well as companies implementing restrictions on business travel by their employees.
Next we have some specifics: Asian exhibitions are being cancelled, revenues at other events impacted due to non-Chinese participation, other US-facing events delayed due to reluctance to travel.
We have a financial impact:
On the basis of what we know today, we currently estimate a one-time adverse impact in FY20 of between £17m and £19m on the Group’s revenue and between £16m and £18m on Group profit in the current financial year, as a result of the issues set out above.
That is a fairly large hit and interesting that almost all revenue loss falls into profit. Stockopedia estimates were for net profit after tax to be £44m.
Hyve: A group still undergoing change
In some ways there is no great time for a virus like this to hit, but now is certainly unfortunate for Hyve. The headline profit figures suggest that this was a business that suddenly started to lose its way as revenues dropped:
Clearly, something needed to be done to get the revenue trend upward again, and in the absence of organic growth Hyve chose to expand by acquisitions. Some of them were large: Shoptalk and Groceryshop was acquired last year for a fee in excess of $140m. A 2018 acquisition, Ascential Events had an even bigger price tag: £300m.
The rationale in these cases were sound: buying an established event is much easier than trying to create one, and in the case of Ascential broadens the range of revenues and offers cross selling opportunities.
What this does mean is that many of the figures are not strictly comparable any more. The next set of annual reports will feature both Shoptalk and Groceryshop, the current ones do not. Going forward, Hyve is a bit of a different business.
Hyve Balance Sheet and Debt
The headline low profitability of the business hides the fact that cashflows were stronger. Statutory profits took the hit as acquired intangibles from previous acquisitions were amortised. Still, the resources required to make the acquisitions were far in excess of retained earnings, and given the upheaval in the business plenty of ‘exceptional’ costs are booked. This led to a large stock issue and bank debt to pay for the companies.
Considering the type of companies that they have bought, predictably this leaves them with a weaker balance sheet. Net tangible assets are largely negative (-£173.5m). In terms of liquidity current assets (£95.4m) are also much smaller than the current liabilities (£145.8m). This in itself is probably not anything untoward. Hyve would get payments in advance from customers wanting to appear at exhibitions. The large deferred income balance (£79m) represents this.
In terms of borrowings, these are high due to the acquisitions. In the annual report the group was almost fully utilising its facility – £147m of £160m had been drawn down. This has since been refinanced. In the last year, interest costs were just over £5m.
One of the advantages of Hyve is that the vast majority of their events are recurring. This gives a certain visibility to revenues, and indeed most of the revenues for the full year ahead had already been secured. In terms of the virus hit, we can see that although some are deferred and should take place later in the year, some will be cancelled and not take place at all until next year.
Most events recur annually and given this number some of the downside risk is covered in that there is no customer concentration risk. In recent years Hyve have moved away from non-core events as a loose Pareto principle applied: a smaller amount of events produced the bulk of the revenues. That’s not where the only change has been seen: geographically the business is now less dependent on the emerging markets and today has much more exposure to the UK and US. In 2017 Russia accounted for almost half of revenues, now just over a quarter.
Is the Hyve Group share price good value?
There is quite a lot to like about Hyve. They have a diverse portfolio of business and many of their exhibitions are proven and successful and very difficult for competitors to muscle in on. Cash flows are stronger than the statutory results thanks to the large amount of depreciation seen, and if exceptional costs drop off the group could be in a good position.
Unfortunately, it is not possible to look past the bad things at the moment. Coronavirus has already affected Hyve’s events badly. It is not certain how this will end up playing out, but at the moment it seems likely that things will get worse before they end up getting better. It also could be the case that demand for these types of events reduce permanently (although I see the prospect as remote).
Hyve have chosen to stretch themselves financially at a bad time, it seems. Whilst the current assessment will still see the company in profit, a prolonged downturn could really hurt. Deferred revenues being refunded (instead of providing a service) also would affect the cash position. There is no mention of covenants but the net debt to EBITDA ratio will seem to be stretched even further this year.
In my view, a company like this is simply betting on what the virus ends up doing. If life gets back to normal fairly quickly, this seems to be a good value bet. A forward P/E of around 10 is not demanding for a company with relatively sticky, diversified revenues and there are many companies that trade on double that.
However if things get worse, it seems likely there will be further downside on the Hyve share price. At present I am not optimistic regarding the virus and would seek to add a highly indebted company to the portfolio in current times. 3/5.