Speedy Hire (SDY) ... speedily higher?

I have bought a few shares in Speedy Hire, the UK tool hire business, at 29.5p/shr as I reckon it should be worth between 45-55p/shr. I like SDY for the following reasons: 

1. In 2009 it was saddled with debt. Net debt stood at c. £250m. Three years on and the net debt position has been brought down to £76m and I reckon this will have fallen further when it next reports. EBITDA has risen from £34.4m in 2009, to £60.3m in 2012 (Mar year-end), and is forecast (Bloomberg) to rise to £68m this year. Debt is much less of a concern.
   
   
2. While the outlook is now much more encouraging than in 2009, bizarrely, Speedy Hire is actually cheaper than it was in the trough of 2009. Yes, its market cap is £64m higher than it was in 2009. However, since then, it has raised £100m via equity and generated £75m of free cash flow. That would suggest c. £111m of cash has not been reflected in its valuation, which equates to 70% of its current market cap.
   
   
3. It has a net asset value of 45p/shr. This compares to its current price of 30p/shr. Even if one were to strip out intangibles (always wise), then its net tangible asset value is c. 35p/shr. In event of the company being sold or liquidated, I actually reckon there to be far higher upside than this. But either way, there is good support there on a tangible basis.
   
   
4. It generates cash. £75m in free cash flow since 2009, and better prospects going forward. That’s attractive to everyone, especially private equity.
   
   
5. Private equity has a record of strong interest within this space.  Archie Norman’s Aurigo investment vehicle together with the US hedge fund Och-Ziff, bought HSS hire in 2007 for £310m. Last year, Ashtead (AHT, mkt cap £1.7bn) together with Belgium’s TVH Services were reported to be interested in bidding for Lavendon (LVD, mkt cap £244m).
   
   
6. It’s cheap to peers. Speedy Hire trades on (Bloomberg consensus) an EV/EBITDA multiple of 3.1x forward year EBITDA. This compares to Ashtead on 5.3x, Lavendon on 4.2x and VP (VP, mkt cap £130m) on 4.2x. Even if Speedy were not to re-rate higher, as the debt is paid down the value of this should migrate over to the value of the equity.

The key risks are:

1. Pricing pressure in the sector, which anecdotal evidence suggests has eased over recent months.
   
   
2. Cyclical risks. However, having been in recession for three quarters, the UK economy may emerge at some point. Who knows?

If truth be told, I bought more than a few.

SDY share price

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