HIT, Hitech Group is a company I have looked at in the past but never taken a position, I cant find anything in my notes as to why I passed it over.
It came up on a screen I was running after seeing an interview with UK fund manager Terry Smith which I found very interesting and much aligned with my own thinking. He also has a very strong emphasis on ROIC as a metric and I ran a screen for ROIC CAGR >20% 7yrs and HIT was one of the results and given the previous work I had done on it I went back to have a deeper dive.
Straightaway it has many of the characteristics that I look for, micro cap, founder managed, illiquid, no debt, high ROIC, high FCF yield and long operating history.
HiTech Group Australia Limited provides recruitment services for permanent and contract staff to the information and communications technology (ICT) industry in public and private sectors in Australia. Its permanent recruitment services comprise the search and selection of candidates for full time employment; and ICT contracting services include the provision of ICT professionals for temporary and other non-permanent staffing needs of clients for specific projects in digital transformation, system development, infrastructure architecture and cloud integration, operation, and supports and project management. The company also offers personnel services to other sectors, such as administration and office support, sales and marketing, and finance. It serves technology companies, banking/financial services companies, and federal and state government departments and agencies. HiTech Group Australia Limited was founded in 1993 and is based in Sydney, Australia.
In short the business is basically a IT Labour Hire company, their claimed point of difference and perhaps source of competitive advantage is the in house software and database they developed for matching staff to clients.
When I ran the numbers in my worksheet for assessing ROIIC & reinvestment rates it was very obvious that HIT has an incredibly capital light business model that produces almost infinite ROIIC at tiny reinvestment rates. This is both a strength and an exposure, of course we want businesses that can reinvest and make great marginal returns on capital, but the problem for HIT appears to be that they have not been able to find anywhere to reinvest, either organically or through M&A. So the returns have spewed out as cash, largely returned to shareholders as dividends.
Other metrics are also very good, FCF yield is around 10%, gross margins have been steady at around 20%, operating margins a shade under 15%, there is no debt and share count has not increased much over the previous 10 years. (to be expected with no requirement for capital.)
The investment proposition is essentially that its a great little business that even with little to no growth, will provide a satisfactory return over the long run simply due to the returns approaching the ROIC over time. Without growth much of the return will likely come from dividends, but its still a reasonable outcome. The upside is that any organic or other growth will provide superior returns and likely multiple expansion.
The risks to the thesis expressed as premortems,
* As the world exited Covid, patterns of work and employment changed, business & government no longer needed as much recruited IT staff and revenue decreased as a result, margins shrunk, and returns were below hurdle rate.
* Management got lazy and disinterested as they aged, the capital allocation became focussed on maximising the short term return to the founders at the expense of the long term future of the business.
* A new player entered the market with better processes & systems, they operated on lower margins and won many of the larger government & enterprise clients from HIT.
Bought an initial position at $1.64 0n 09/03/21
A friend sent me this research that he did a couple of years ago,
https://drive.google.com/file/d/1PEqWXdexlcRu03KcWH_HOhGnMfGfbN7O/viewWhy will this business be around in 10 years? - Not much conviction that it will be, but not improbable. They seem to have combined the algo software and database to provide a differentiated service in IT labour hire. Also it has been around for 30 years already. Lindy effect.
