HSS crashes 38% on profits warning

Almost £76 million was wiped off of HSS Hire's market value on Wednesday, after the tool rental firm warned that its full-year earnings will miss expectations due to a slower and erratic recovery in the repair, maintenance and improvement (RMI) markets. The news triggered earnings downgrades across the City, but one analyst still reckons the group has re-rating potential.

The hire firm's results for the 26 weeks to 27 June were in-line with the group's pre-close statement in June, with revenue up 12% to £146.4 million, driven by growth in its specialist businesses.

EBITDA (earnings before interest, tax, depreciation and amortisation) was flat at £28.9 million and losses of £14.1 million represent 4.45p per share, which has shrunk from 6.03p last year. A 0.57p per share dividend has also been declared, although this is uncovered.

Gross margins contracted from 64.3% to 62.4%, however, due to heavy investment in the period. HSS opened 39 shops in the year to date (27 in the period), and is on track to reach 50 by the end of this year. Its acquisition of All Seasons Hire also drove growth in its specialist businesses.

However, following slower than expected recovery in the RMI and housing markets, management are concerned about the rest of the year after a weak August trading period followed a "reasonable" July. Revenue growth has underperformed this year and is expected to grow between 8-11% by the end of the year.

"This variability, period-on-period and week-on-week, is making it more challenging to predict the outcome for the year," said the company. "Against this backdrop, we now expect revenue and earnings for the full year to be below current market expectations."

Still, HSS is confident that its three-pronged strategy - which focuses on new local businesses, growing the key account customer wallet and bolt on acquisitions - is helping to support growth.

After the profits warning, JP Morgan analyst Alexander Mees has downgraded his full-year forecasts for the firm, lowering his EBITDA forecast by 8% to £75.1 million for 2015 and by 11% to £89.2 million in 2016. The analyst's adjusted EPS forecasts have fallen 38% to 6p this year and by 19% to 13.3p for 2016. Next year is set to benefit from cost savings and debt refinancing.

Although he has lowered his target price from 240p to 280p, Mees is hopeful: "We retain an 'overweight' rating as we believe the multiple continues to offer re-rating potential over the next 12 months if, as we expect, forecast growth stabilises."

HSS Hire's shares fell 38% to 79p on Wednesday, two thirds lower than its 210p float price.

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