Hodgins Continues to Generate Higher Commission Rates and Margins Even on Lower Auction Volumes
We
recently published an update report on Hodgins Auctioneers Inc. (TSXV: HA) and think that it is an interesting
company for investors to look at given the current economic environment.
Hodgins
Auctioneers Inc. provides auction services of agricultural, and industrial equipment
and real estate. The company conducts live onsite auctions primarily in Western
Canada, and also has an online only auction platform. Hodgins offers a range of
services such as marketing campaigns, financial guarantees, outright purchases,
live internet bidding, and various support services.
What
we find interesting about Hodgins is that the current economic environment
represents a double edge sword for the company. A large portion of their business is agricultural and based in
Saskatchewan. Our research indicates
that total farm receipts in Canada declined 11.8% for the first nine months of
2009 relative to 2008. During this
period, the decline in Saskatchewan was especially harsh, 20.1%. We believe that this has led to a lower
number of auctions being conducted by the company.
However,
on the upside, while lower cash receipts will cause farmers to only buy equipment
when necessary, they will also tend to look at used equipment when they do have
to buy. This should eventually benefit
Hodgins. Also, the company has been
proactively trying to offset declines in the number of auctions held, by
increasing its commission rates, gross margins, and diversifying into other
types of auctions. We see evidence of
its strategy working in recent financial results. Although auction revenues declined in Q3 and
the first 9 months of 2009, average commission rates and margins improved.
The
company is also on track to roll out its new online auto and real estate
auction platforms in the second or third quarter of this year. We believe that if the company can make
traction in these areas, it will be good for the bottom line though we have not
factored these areas into our models yet.
One
risk we see is that our models indicate that the company will have to raise
some capital this year which it is currently doing. They have not had to raise equity since
2004-2005. Raising capital is difficult
in this environment, and management has stated its intention to fund the
company themselves by selling personal share holdings to reinvest in the
company. This is a strong vote of
confidence in the company should it occur.
In
terms of valuation, the stock is currently at $0.135 and our discount cash flow
model values it at $0.20. We recently
revised our valuation after making an allowance for higher G&A expenses as
revenues grow. Our current rating is BUY
with a risk of 3 (average).
Those
interested in Hodgins can visit our library for all our reports on the company. For all available research, click: Hodgins Auctioneers.
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Disclosure: Fundamental
Research Corp provides fee based coverage on Hodgins.
Brian Tang, CFA, is the President of Fundamental Research Corporation. Prior to founding Fundamental Research Corp. in 2003, Brian was an analyst in
the corporate banking group of one of the world's largest
international banks where he performed fundamental analysis on
Financial Post 500 companies (the Canadian equivalent of the
Fortune 500). Prior to this, he worked at a financial advisory
firm where he analyzed and published research on Canadian equity
mutual funds.
Brian
holds a Bachelor’s Degree in Business Administration (Finance with a
minor in Economics) from Simon Fraser University. He also holds the
Chartered Financial Analyst (CFA) designation. Brian is a member of the
CFA Institute (formerly the Association for Investment Management and
Research) and CFA Vancouver (formerly the Vancouver Society of
Financial Analysts).
