HGL Limited (HNG)

Market cap: $70m
P/E: 4.86
P/Book: 0.94
Dividend Yield: 8.6%

Something like a mini-Berkshire (without the insurance “float” to source new capital), HGL is a conglomerate of diversified import businesses serving niche markets such as model cars, school hats, and special format printing. HGL make no effort to integrate their acquisitions, choosing to let senior management operate autonomously and incentivise them to build long-term performance.

HGL are value investors themselves, making acquisitions where they can purchase entire companies at the right price. HGL continue to look for quality businesses to acquire, and even list their criteria on their website.

Until very recently, HGL has held a stock portfolio in addition to its businesses. It was probably the correct move for management to liquidate this portfolio and concentrate on their importer business model: to improve core business profitability and find new acquisitions. While some of these businesses are 100% owned by HGL, a number have their ownership shared between HGL and management.

Dividends are regular and can be reinvested although no discount is offered. At a current gross of 8.6% HNG are very healthy payers, reflecting a payout of roughly 80% of earnings. The one weakness to HGL’s relative cheapness is the inconsistency of earnings – HGL did not sail smoothly through the GFC, with earnings falling from 19.2 cps in 2007 to 10cps in 2009, before rebounding to 13.3cps in 2010. HGL’s moat exists due to the niche nature of the products they offer. These niche areas are difficult tor larger players to service, and results in higher gross margins than you would expect for a typical importer/retailer (in excess of 40%).

Because the majority of purchases made by HGL are made in US Dollars, the current strength of the Aussie should benefit the business in the next reporting period. Long-term I expect the US Dollar to continue weakening, thanks to their terrible economic policy – resulting in continued benefit to HGL’s businesses.

The current price of $1.28 puts HNG’s P/E ratio at less than 5 – outstanding value for a company with negligible debt serving specialised markets, raising the barrier to entry for competitors. I’ve had HNG on my watchlist for some time, and I’m ready to take a long-term position over the coming weeks. The business is significantly undervalued, and I wouldn’t give serious thought to selling until the share price rose to pre-GFC levels – roughly double the current price. Buying before the dividend is paid in June would also reduce capital gains if they were ever realised.