Taking the hire ground

By Mark Peart

Friday 4th June 2004

Hirequip is busy selling some assets but buying others. Mark Peart talks to its conservative southern founder, Stuart McKinlay, about the company's busy recent past and what the future holds.

Stuart McKinlay makes no apology for his innate southern conservatism. It's been his guiding principle in 35 years in the hire equipment business.

McKinlay is in his Dunedin office, a week after the company in which he has a 27% stake, Dunedin-based Hirequip New Zealand, has racked up its latest acquisition, specialist generator hire company Power Hire, for $11.3 million.

The 59-year-old reveals he's often been at the epicentre of vigorous philosophical debates within the company about the degree to which Hirequip should consolidate or take risks, and about goodwill issues.

He says his main thrust, through his cornerstone shareholding in New Zealand's biggest general hire company, is in seeing Hirequip be a strong New Zealand-listed public company.

"I'm probably a little more conservative than others ... the mix of directors and management comes up with the right decisions, probably because of my southern conservatism. I say that very seriously.

"Although I understand it, the financial value and what you can sell it for are two different things. I still lean very heavily on the market-driven kick-the-tyres attitude."

Hirequip settled on Power Hire after looking at crane hire businesses, scaffold hire companies, aerial platform hire companies and specialist earth-moving equipment hire companies.

"In our product mix, our number one product, which is 25% of our revenue, is earth-moving equipment, which is excavators and loaders and associated dirt equipment.

"It's also an area that in the lower part of the economic cycle is likely to slow more than others, so in selecting where we invest our dollar, things that are not as prone to the other part of the cycle are appropriate hence Power Hire."

Hirequip is due to settle the Power Hire transaction next week with family interests associated with former owner Michael Jacomb.

Jacomb, who will remain a consultant to Hirequip, established Power Hire in 1975 at Upper Hutt. Hirequip is paying him $5.8 million in cash and issuing him 5.79 million Hirequip shares at 95c a share.

The share price was about 95c at the beginning of April but has hit $1.10 since then.)

It is Hirequip's third major purchase in six months. In December last year it bought North Island hire company Ready Hire and Christchurch general hire business Hamill Hire, which increased the company's hire business revenues by more than 30%.

Hirequip now has 48 branches, incorporating 13 of the former Ready Hire branches. Auckland is its focus for branch expansion, with the six existing branches projected to grow to about 10.

Power Hire will add $6.5 million in earnings a year to Hirequip, pushing its annual turnover up to $70-80 million.

McKinlay believes Hirequip will ease off its acquisition mode and go into a "utilise-the-asset-better" mode.

"We want to get better at using what we've got. We've got another couple of years before we bed down Ready Hire in its entirety and Power Hire so that it's running sweet."

Run that past fellow Hirequip shareholder and executive chairman, Graeme Wong, and the risk-taker element of the company emerges.

"The board has to decide to what degree we want to grow, to what extent the economy will grow, to what extent we will risk our business activity by degearing our balance sheet," Wong says.

"There are all sorts of choices. They're not straightforward from the point of view of 20-20 foresight.

"On the one hand we could just sit back on our haunches and take a conservative view. The flip side of it is that acquisition opportunities don't come along every day. If they're good enough, somebody's got to make a choice as to whether they should or shouldn't take the risk."

Wong says Power Hire was attractive not only for its growth potential but also for earnings that are unrelated to the construction cycle, which allow some diversification.

Hirequip already operates in the generator hire market, providing generators up to 550 kVA, and the combined business, following this acquisition, will increase Hirequip's hire revenue in this sector by up to 250%.

McKinlay says size in the equipment hire business is an advantage. "We have the big plus of being able to move the asset to where the work is." That has been key to the company's success.

"Small general equipment hire companies that are geographically located in the right place where we don't have a presence if the price is right, even if you have to pay a bit of a premium for it far outweigh starting up down the road and going into competition with a little guy, and we've done a few of those."

"The direction we feel is most appropriate has been specialisation within hire."

"Because of the power situation in New Zealand, the logic of buying Power Hire Ltd is superb. There's a reasonable proportion of goodwill in the transaction and it fits well with Hirequip," McKinley says.

Wong says the board needs to get its collective mind around just what its core business is and should be.

"The fact is we are the largest general hire company by quite some margin as it is. We can grow that further by adding more branches, most particularly in the North Island.

"If we took a different view and looked at the other allied activities we could get involved in, like Power Hire, then I think there are some specialty hire companies that are interesting as major players in the industry. But are they businesses that a general hire business would add to its fleet and run through the existing branches? No, not really."

In November 2000, McKinlay agreed to sell half of Hirequip, to equity trusts managed by Grant Samuel Private Equity, at the same time as it bought Projex Equipment Hire from Viking Pacific (formerly Skellerup and Maine Investments, then owned by Goldman Sachs.)

The Projex name was progressively changed to Hirequip, and at the end of 2002, Southern Capital, founded by the late Dunedin entrepreneur Howard Paterson, bought the Grant Samuel Private Equity holding.

Six months later, at the annual meeting of Southern Capital, shareholders approved the issue of 27% of the capital to McKinlay, in exchange for his 50% of Hirequip.

In the 14 months since Hirequip was backed into Southern Capital, the company has started paying a dividend and has enjoyed significant asset growth, McKinlay says.

Before Paterson came on the scene, McKinlay was talking to another prospective buyer, who didn't meet Grant Samuel's price requirements. Over a beer with Paterson, the would-be buyer suggested Paterson might like to venture where he had failed.

True to form, Paterson wasted no time, looked at the business, was impressed with what he saw and delegated authority to McKinlay to negotiate a sale price with Grant Samuel. Within two months the deal was done.

McKinlay says although Grant Samuel's shareholding lasted only about 20 months, it exited with 1.7 times its initial investment.

So how has he managed to become comfortable in a realigned Hirequip? "I've re-educated myself. There are a lot of challenges and I guess it's fair to say I've just done what I've always done but on a larger scale. We've been fortunate we've got a lot of skilled and faithful staff."

On Paterson: "Howard had a vision. He was the guy that saw the pluses of backing Hirequip into Southern Capital and it was certainly his initial schemes that got the ball rolling."

On Hirequip's prospects: "We see ourselves as a $70 million or $80 million turnover company; we would like to think we're going to be a $100 million company in two or three years. I guess it's all very well having targets of those turnovers but we'd like to think that the essential part of the business, being the profit, follows that increase in revenue."

On the possibility of Hirequip being taken over (Australian Coates Group has been one suggested bidder), McKinley says: "I don't think anything will come of that. We're firmly entrenched as a New Zealand publicly listed company and we've got some pretty solid shareholders.

"I'm not aware of any predators. I'm sure they'll come and talk to us if there are."

On that score, Wong adds: "We're a public company. We would encourage shareholders to recognise the true value of the company, which has gone from 60c to $1.09 in a year. We think we're going OK. If shareholders want to buy or sell, that's completely within their realm of decision-making or responsibility."

McKinlay says Hirequip has continued to spend 25% in excess of depreciation, "so we're spending a portion of our profit in growing the company.

"It's been a good decision because we've done that while the dollar's been strong. We're reviewing that for this coming year and we're of a mind that we'll try to balance that equation and spend depreciation plus sale of plant and that will be it for this current year."

He says the company is in a strong cash position and it still builds up good relationships with equipment manufacturers around the world, including building direct relationships that give it buying privileges others don't enjoy.

The recent rise in the company's share price has been "a little bit of a reaction" to the Power Hire transaction.

"To put Power Hire in context, it's a specialist company of which 30% is marine-related, a business that Hirequip has not been in and in essence not a business that competed head-on with us in 20-25% of product range."

McKinlay says there are administrative savings to be made, with minimal impact on the company's 450 employees.

"We'll bring the one southern Power Hire employee into the Dunedin branch of Hirequip, and we can add value [overall] with expertise, and database and asset management."

In the meantime, that mix of southern conservatism and big-city smarts should continue to be a potent one for Hirequip.

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