Pinned straw:
About HiTech Group
The HiTech Group is Australia’s leading specialised ICT contracting, consulting and recruitment organisation. Our personnel division provides staffing solution in the areas of ICT, Finance, Admin & HR, Sales and Marketing. HiTech provides services to Australian and international organisations and has more than 27 years experience in the industry (founded in 1997). Our clients include Federal & State Government departments (https://hitechaust.com/about)
Record 1H24 Results
On the 19th February HiTech Group announced a record half year result (see 1HFY24 Results Announcement below). Here’s the highlights:
➢ Gross profit $6.08m up 37% on pcp
➢ EBITDA of $4.14m up 27% on pcp
➢ Net profit before tax $4.15m up 30% on pcp
➢ Net profit after tax $2.66m up 18% on pcp
➢ Interim dividend of 5.0 cents per share
This is quite an achievement when you consider that other labour hire/contractor type businesses, (eg. PeopleIn - PPE), have reported labour hire and consulting services revenue in the lucrative (high margin) Information, Communication and Tech (ICT) sector falling significantly in the first half of FY24. HiTech appears to have a more resilient business model than its peers operating in this sector. The business might have some similarities to the consulting component of Technology One or Data#3.
HiTech management have noted that “Despite facing challenges in the first half of FY24, we confronted them with renewed focus and determination. Demand for top-tier ICT talent and services in the Government sector persists, despite recent changes in government.”
Optimistic Outlook for FY2024
Despite a challenging 1H24, Management seemed to be optimistic about the full year, saying:
“HiTech is well positioned to capture market demand for ICT talent and services with a strong balance sheet and long-term supplier agreements in place.
The Australian Government has targeted a reduction in ICT contracting in some agencies. We have seen a reduction in contracting agreements leading into the end of the calendar year, however, there are several Government agencies still looking to bolster their talent pool, especially in the cyber security and digital infrastructure space which should counter the other agencies’ reduction.
Early signs of continued demand in the federal government sector for specialist IT talent are encouraging. HiTech remains fully prepared to take advantage of the demand for skilled IT talent as and when the opportunities present themselves.
HiTech has several active client mandates for our services and continues to see various tender pipelines for new business in both the federal and state government sectors where some ICT programs of work remain vital.”
High Return on Equity
HiTech Group has a very high ROE (71.5% for FY23) and it has been consistently improving every year for eight years now. Management did not provide guidance, however were optimistic about 2H24. If we assume NPAT will be similar in the second half, we might expect full year earnings for FY24 to be approx $5.3 million ($5.86 million for FY23). With shareholder equity of $8.16 million that would put FY24 ROE at 65%.
Good Margins
Gross Margin 19%, Net Profit Margin 8.65% (1H24).
Double Digit Earnings and Dividend Growth
Earnings have grown at over 10% per year for 8 years while it has paid out 70% of its earnings as fully franked dividends. The current yield is 4.8% fully franked (6.9% including franking credits). With continued strong earnings and a very strong balance sheet the dividends look sustainable into the future.
Excellent Balance Sheet
HiTech has been debt free for over 10 years and it currently holds over $10 million in cash. That means it’s holding 11.5% of its market cap of $87 million in cash, and more than its total shareholder equity of $8.2 million. That’s an incredibly solid balance sheet. It sounds a bit too lazy actually, and I wonder what plans management have for this much cash. Perhaps they are waiting for an acquisition opportunity?
Management
(Source, Simply Wall Street)
The CEO, Mr. Elias Hazouri, B.Sc., MBA (55 yrs) has been the Chief Executive Officer of HiTech Group Australia Ltd. since August 2016. Mr. Hazouri serves as the Chief Information Officer and General Manager of HiTech Group Australia Ltd. and has been its Company Secretary since February 13, 2015. Elias Hazlouri owns 20.9% of the business.
Mr. Hazouri has many years’ experience in IT and banking. His knowledge of HiTech's business is extensive. Throughout his career, he has been integral to the development of many IT systems and IT support departments.
He has held roles ranging from programmer to technology support head. He is a key resource and knowledge base to HiTech account managers and is jointly responsible for generating new business by way of tender. He has advised on business strategy, both from a financial and operational perspective, since the inception of HiTech in 1993. He has been Director of HiTech Group Australia Limited Since July 19, 2013.
He served as Director of HiTech from 1993 to March 2000. Mr. Hazouri holds B Sc, MBA.
Ownership and Liquidity
HiTech shares are tightly held and relatively illiquid (a true lobster pot). It’s taken me a while to accumulate just a small holding IRL. You could get seriously burnt if you needed to get out in a hurry.
The Hazouri family owns nearly 68% of the business and the top 21 shareholders hold nearly 81% of the shares in the businesses. That might explain things. On some trading days there are no shares changing hands at all. Actually, with such concentrated ownership you’d have to wonder why they bothered listing in the first place?
Things I don’t like
I think HiTech could do a better job of its capital management. The share count has increased from 31 million (2015) to 42.2 million (2023) over 9 years. As a result the book value hasn’t changed in 8 years (19 cps).
Perhaps management should be using some of their spare cash to buy back shares. With such a high ROE (+70%) and with shares trading at a reasonable price, I think shareholders would benefit from a lower share count, increased book value, and less lazy cash sitting on the balance sheet.
Valuation
HiTech trades on a PE multiple of 16 times FY23 earnings of 13cps. I expect FY24 earnings to be flat to slightly lower given some slowing in the economy (approx 12.6cps). That would put HiTech on a forward PE of 16.4 x estimated FY24 earnings. This seems reasonable for a business investing c. 20% of their earnings back into growth at +60% return on equity.
Using McNiven’s Formula and assuming future ROE of 65%, Equity of $0.19 per share, 20% of earnings reinvested, fully franked dividends (4.8% or 6.8% gross), and requiring an annual return of 11%, I get a valuation of $2.14 per share. It’s currently trading @ $2.06 per share, not a huge discount, but it looks like a quality business.
Disc: Very small holding IRL at this stage (0.4%)
Share price flat for 3 years. PE multiple of 15x
➢ Gross profit $6.08m up 37% on pcp
➢ EBITDA of $4.14m up 27% on pcp
➢ Net profit before tax $4.15m up 30% on pcp
➢ Net profit after tax $2.66m up 18% on pcp
➢ Interim dividend of 5.0 cents per share
INTERIM DIVIDEND
We are pleased to declare an interim fully franked dividend of 5 cents per share.
“The performance of the HiTech Group is exceptionally satisfying. Our first-half FY24 results set a new record, underscoring the relevance and effectiveness of our service and value creation model. Achieving record profits involved prompt measures to reduce operational costs in areas with unattractive margins. We are now strongly positioned to enhance shareholder returns and fortify our cash reserves.
Our unwavering determination to achieve record growth in operating profits, positions us well to continue to supply a critical and essential service to the Australian community.
Despite facing challenges in the first half of FY24, we confronted them with renewed focus and determination. Demand for top-tier ICT talent and services in the Government sector persists, despite recent changes in government.
I extend my gratitude to our valued clients, candidates, contractors, and our highly dedicated and skilled staff for contributing to another successful half-year record.” CEO, Elias Hazouri said.
Outlook for FY2024
HiTech is well positioned to capture market demand for ICT talent and services with a strong balance sheet and long-term supplier agreements in place. The Australian Government has targeted a reduction in ICT contracting in some agencies. We have seen a reduction in contracting agreements leading into the end of the calendar year, however, there are several Government agencies still looking to bolster their talent pool, especially in the cyber security and digital infrastructure space which should counter the other agencies’ reduction.
Early signs of continued demand in the federal government sector for specialist IT talent are encouraging. HiTech remains fully prepared to take advantage of the demand for skilled IT talent as and when the opportunities present themselves.
HiTech has several active client mandates for our services and continues to see various tender pipelines for new business in both the federal and state government sectors where some ICT programs of work remain vital.
With more than 55 years combined expertise in the ICT Talent and Services market, there is no more experienced and financially secure Australian organisation in our sector or board suitably positioned to maximise shareholder return and navigate economic headwinds as they are encountered.
-ENDS-
Re the complaint of poor liquidity, I think it's worth quoting Peter Lynch on the topic:
"Another way that a lot of fund managers hemmed themselves in was by worrying about “liquidity.” They avoided all the wonderful small companies—a good collection of these could do wonders even for a big portfolio—because the stocks were “thinly traded.” They’d get so absorbed in this problem of finding stocks they could get in and out of in five days or less that they’d lose sight of whether these things were worth owning in the first place.
In stocks as in romance, ease of divorce is not a sound basis for commitment. If you’ve chosen wisely to begin with, you won’t want a divorce. And if you haven’t, you’re in a mess no matter what. All the liquidity in the world isn’t going to save you from pain, suffering, and probably a loss of money."
Also:
"For one thing, 99 percent of all stocks trade fewer than 10,000 shares a day, so fund managers who worry about liquidity are confined to 1 percent of all publicly traded companies. For another thing, if a company is a loser, the fund manager is going to lose money on the stock no matter how many shares it trades, and if it’s a winner, he or she will be delighted to unwind a position in the stock leisurely, at a profit."
(From 'Beating The Street')
(Worth remembering next time you hear them whining about "lobster pots" and "trades by appointment" on 'The Call' et al...)
@RogueTrader these are all good points, indeed. So, I'd like to explain my remarks about $HIT and liquidity in the context of my investing process. To be clear, I wasn't complaining about $HIT. I was just quantifying its liquidity and concluding that - for reasons explained below, it doesn't fit at the moment in my portfolio. So, my post was unclear because I didn't explain this context.
My ASX portfolio has 23 stocks and 2 trackers, albeit 61% of value is concentrated in the top 10, which include larger companies. I have held many of these top 10 for a long time - some since I started investing in the ASX (late-2016).
Of my ASX holdings, some 35% by value are "higher risk" positions. These number around 10-15, depending on how you classify them. Around 10 are small/mid caps. (<$1bn).
For me, liquidity IS important because in this riskier end of my portfolio, I am very much learning about each company, its management, market, and competition, and hopefully growing my conviction over time. However, unlike the "proven" end of my portfolio, I do more frequently "churn" the ideas here, and it is important for me to be able to recycle capital and not have too much that get "stuck". "Stuck" could be due to a trading suspension or it could be where the SP falls significantly below my range of views on value.
I purposefully invest in ideas with lower liquidity (e.g. $RFT, $DSE, $AVA, $8CO, $SGI, $ALC, $IKE - taking examples over the last two years, although some I have exited). It is otherwise hard to have a meaningful ASX small cap exposure. So, I agree that patience is a virture.
However, I measure and manage my total exposure to illiquid holdings. I like keeping my total exposure there at <15% of my portfolio value. Others, particularly small cap specialists probably don't have such a "rule", and that's fine and no doubt valid in their process.
The reason for sharing this is not to say that my way is right. On the contrary, I am not a great or particularly successful investor. Rather, it is to say that everyone's approach should make sense in the context of their overall investing strategy, process, and risk management approach.
Before reading your post, I just read the following on X by Ian Cassell:
When I read the wisdon of more experienced and successful investors, I always ask two questions:
- What can I learn from this, given my investing strategy and process?
- Does the insight lead me to adjust my approach, to better achieve my goals?
@Rick great profile and it looks like a good business. The business is 30 years old and its last AGM was its 24th!
If you bought it 10 years ago, you've had a 30+ bagger! And it more than doubled in the last 5 years, plus reasonable dividends on top. So nothing I write below can take away from that.
However, for me, it is uninvestible for several reasons.
Liquidity
Average daily volumes were c. 5000 ($10k) over the last 12 months. And on about 60% of days, I would be unable to trade the typical minimum parcel I transact on microcaps.
(By comparison $SGI, one of my smallest microcap holdings, trades on average $20k per day and I can't trade my minimum parcel on only 40% of days. So even though $HIT is over 3x $SGI's market cap, $HIT is extremely tightly held. Having a stable register is a good thing, but can you have too much of a good thing?)
Board and Management
Chair and MD have little profile and I know nothing about them. It looks like they don't hold investor/analyst meetings, so the only way I'd get to know management and the board would be to travel down to Sydney each year for the AGM. In any scenario, I'd be unlikely to have a large enough holding to justify this.
Investor Engagement Process
For me, a big part of the investing process it "getting to know" the Chair, CEO, CFO and sometimes other key executives and board members. I listen carefully to how they describe their business, its performance and prospects, and how they answer analyst/investor questions. Sometimes, I even ask my own questions. Because we all read the releases and the published accounts, I compare and constrast their narrative to my own analysis of the data. Without an opportunity to engage with management, I'd feel like I was investing in a business I didn't and couldn't understand. It might be a great business and it might continue to do amazingly well, but it doesn't fit my investment process.
I agree with your comment:
"The Hazouri family owns nearly 68% of the business and the top 21 shareholders hold nearly 81% of the shares in the businesses. That might explain things. On some trading days there are no shares changing hands at all. Actually, with such concentrated ownership you’d have to wonder why they bothered listing in the first place?"
Perhaps @Strawman could invite them to a meeting. I wonder if they would accept? Perhaps an annual showing at a Strawman Meeting could address my concerns? Not sure.
@Rick you must use a very similar screen to me. i just started looking at this one a while ago. i realise it ticks a lot of the lowish pe high ROE boxes. a couple of questions the market could be asking is (like some others with these characteristics), is the business of high quality regardless of its high roe, ie is the high roe unable to to maintained on a much higher asset base, put another way, have they saturated the sweet spot and the future is tougher, dont know, that is a real question but they have shown enough to be passable on this measure, imo. secondly, it is tightly held and that could be good or bad, don't know the guys in charge, and they keep a low profile, again could be good or bad. given this i gave it a miss at this stage, but all your write up is about the same as my thoughts.
Nice write up Nick.
I believe they were talking about an acquisition 4 or 5 years ago with the cash. Struggle to see much growth but having traded sideways now for a few years the valuation looks to be more reasonable. Thanks for highlighting.