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George T. Schlieben, Publisher SPECIALÿRESEARCH REPORT September 11, 1997c1997. GLOBAL PENNY STOCKS, PO Box 372, Yardley PA 19067. Information contained herein is based on sources we believe to be reliable but we do not guarantee its accuracy. Prices and opinions concerning the composition of market sectors included in this report reflect the judgments as of this date and are subject to change without notice. This report is for information purposes only and is not intended as an offer to sell or a solicitation to buy securities. Global Penny Stocks or persons associated with it may own securities of the issue described herein and may make purchases or sales while this report is in circulation. The publisher, George Schlieben, received a fee from the company to write this report.
H & R ENTERPRISES, INC.
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NOTE: Unless stated otherwise, all denominations herein are in Canadian dollars. Price: OTC BULLETIN BOARD: HRNT) $2.50* E.P.S. Yearly Range:$5.12 - 44›1997$.00Shares Outstanding:10 million1998E$.21Estimated Float:1.5 million1999E$.35Market Cap:$25 million* see (Potential For Explosive Revenues) on back pageBook Value Per Share:$6.00*Estimated Growth Rate:100%BALANCE SHEET(3/31/97)Dividend:NilNet Working Capital$720,000Return on Equity:NilCurrent Ratio2.4-1Marginable:NilLong Term Liabilities$1,379,000Average Daily Volume:250,000Shareholders Equity$856,000Location:Abbotsford, British ColumbiaSuitability:Aggressive SpeculationRecommendation:STRONG BUYOne-Year Target:$5.50 to $7.00Two-Year Target:$7.00 to $10.00
INVESTMENT CONCLUSION
Ever hear of LVMH Moet? Probably not, but, no doubt, you have heard of Hennessy malt liquors, Moet Champagne, and Givenchy. These companies, along with other noted makers of luxury products, are all owned by LVMH, a French holding company. Three years ago, the NASDAQ-listed LVMH was trading at around $15; today, their stock is hovering in the high $40’s to low $50’s.
In general, holding companies are not sexy investments. They are not hi-tech, bio-tech, or gaming. However, if managed properly, they can grow into blockbuster stock plays, if investors have some patience and can make a long-term commitment.
One company that has made significant progress in a very short time, and has set the stage for developing into a major holding company is H&R ENTERPRISES, INC.(OTC BULLETIN BOARD: HRNT).
In fact, almost overnight, the company has positioned itself to become a mini conglomerate.
H&R is an investment holding company with diverse interests in vending and video arcade games, leasing, franchising, financial discounting, and real estate. It has much faith in its capabilities. Seldom do we see a company with the elan to project its revenues and earnings for the next three years. Between now and 2000, H&R anticipates nearly a 50% per annum growth in revenue, and a similar percentage gain in earnings.
Accordingly, we rate the shares of H&R Enterprises, Inc. a STRONG BUY with SPECULATION. Given what the company has achieved to date, we are inclined to show some faith in their future projections. Yes, these could be somewhat aggressive, but the company has given us little reason to doubt their bullish attitude. Our one-year target for stock price is $5.50 to $7.00; two-year target is $7.00 to $10.00.
COMPANY BACKGROUND
H&R Enterprises, Inc. changed corporate ownership and was restructured in February of this year. At that time, H&R underwent a total overhaul in senior management and corporate philosophy. Its primary focus is on the strategic acquisitions of undervalued, strong cash-generating niche businesses in emerging and growth industries. H&R seeks acquisitions that have the potential to be highly profitable but require minimal capital funding.
This investment holding company has interests in vending and video arcade games, leasing, franchising, financial discounting, and real estate. The following is a breakdown of H&R’s holdings, which appear impressive, to say the least:
Capital Hill Ventures, Ltd. This company now has over 400 vending and arcade machines located in Western Canada. Plans are in the offing to purchase an additional 1600 machines within the next three years. H&R is also in active negotiations to acquire two major competitors, one specializing in food service vending and the other in game machines. Upon completion of this aggressive acquisition program, H&R expects to have 8,000 to 10,000 machines operating in Western Canada and the Northwestern US.
Colombo's, Inc. It’s a great name for this coming chain of company-owned and franchised cigar stores. Now it just needs Peter Falk as its spokesman. Like them or not, cigars have gone from "fad to fixture". They are here to stay. The first three stores are slated to open by the end of August to early September. Each Colombo’s will come complete with a retail store, smoking lounge, velvet couches, humidors, and coffee bar. H&R foresees 15 stores in operation by next Spring, and with the impetus of franchising, the company projects 50 to 60 Colombo’s by the end of 1998. And, yes, the Canadian stores will sell Cuban cigars.
Emerson Acceptance Corporation. The acquisition of this company which specializes in the financial discounting of trade receivables and the leasing of low cost electronic equipment is considered a coup by H&R. Emerson has developed a unique market niche for its financial discounting or "factoring" business by targeting client companies within specific industries, whose services are billed to and directly paid by government-owned corporations or agencies in British Columbia. The demand for Emerson’s factoring services are primarily the result of poor turnaround time on government payments, which, for many small to medium-sized businesses can adversely affect operations. A planned capital injection of $2 million should dramatically accelerate the growth of Emerson’s core business and provide H&R an exceptional cash flow, with projected minimum returns in excess of 40%.
One of Emerson's primary focuses is on factoring "government approved" billings, due and owing, to autobody repair shops, from the Insurance Corp. of British Columbia (ICBC). Material damage claim payments made by ICBC are expected to near $800 million for 1997.
Quail Ridge Capital. This is the most recent H&R acquisition, and from the surface, appears to be its biggest plum. This asset purchase includes the $225 million Quail Ridge Community Development, has a current net market value of $60 million, and should generate annual after-tax earnings of $10 million to H&R based on current development to date. This equity purchase has enabled this asset portfolio to flow to H&R "debt free". The net effect of this transaction will increase H&R’s net earnings by an estimated $1.00 per share for FY 98, which ends 3/31/98, and immediately add $6.00 of net book value per share, on a fully diluted basis, to the company’s balance sheet.
The Quail Ridge Community, located in British Columbia, is an award-winning, master-planned golf and country club development. The 544 acres of gentle rolling hills features an 18-hole championship golf course, guest lodge and residential and commercial Village Center as its focal point. The development is currently zoned for 980 single and multi-family homes, with construction of a new clubhouse, sports center, and world-class spa facility planned for early 1998.
What is rather amazing is that H&R made all of the above acquisitions during a seven-week period from June 2 to July 24. While none of these purchases are glamour industries, they hold the promise of bringing to H&R an enormous amount of revenue and solid earnings.
And a potential investor should be wondering what is next on the H&R agenda?
To date, H&R's acquisitions have been achieved mainly through equity financing, which, of course, creates further stock dilution. However, if hard assets and cash flow are received in return, such as with Quail Ridge and Emerson, then the dilution becomes a sweeter pill to swallow.
One thought worth noting about holding companies is that they are able to insulate themselves from potential problems. All of H&R's holdings are subsidiaries. If one falters, its failure should not be fatal to the whole.
The company's address is H&R Enterprises, Inc., 2015 Paramount Crescent, Abbotsford, British Columbia V2T 6A5, Canada. Phone: 888-299-2995; 604-864-8858 or fax: 604-504-0978.
COMPETITION/RISKS
There are thousands of investment holding companies around the world, privately and publicly-held, and the competition among them is very fierce. Many have access to financial resources that are far superior to H&S Enterprises. This could hamper H&S growth should it find itself in a bidding war with these companies for the same property (ies).
While holding companies, like H&R, are able to insulate the parent company from a faltering subsidiary (ies), there is no guarantee against financial or legal ramifications due to that subsidiary's failure.
Although H&R is not cash-starved right now, it will need considerably more capital to finance operations and meet obligations, such as infusing the subsidiaries with needed funds to ensure their operations and projections. One method of raising capital will be through the use of equity financing, or issuing secondary stock. Should H&R ever be unable to continue with this equity financing, its operations, and those of its subsidiaries, could be severely affected and/or unable to continue.
Assuming H&R performed proper due diligence before acquiring its current subsidiaries (and possible future entities), there is always the possibility of a hidden liability that could severely affect H&R’s operations.
This is a company that has almost completely relied on public stock offerings to secure needed financing. As this new stock enters the public market, share price could be adversely affected.
MANAGEMENT
Laurie A. Larson, President, is a practicing member of the British Columbia Certified General Accountants Association. Her Clients include a cross section of national and international companies, and these contacts will be important to the future of H&R Enterprises. She has also been a supervisor of the corporate and accounting groups for a national food chain. Ms. Larson brings to H&R a unique blend of business, taxation, personnel, and international operational knowledge.
Dr. Elaigh J.T. Guidera, Secretary, Treasurer, is also the Senior Development Officer and Senior Consultant of Buck, Guidera and Associates, which writes and designs the latest turnkey computational systems in use in the lower mainland of B.C. His access to existing and emerging markets will keep H&R well informed about future acquisitions. Dr. Guidera has a Ph.D. in Applied Mathematics from Simon Fraser University and a M.Sc. in Mechanical Engineering from the University of California.
Historical and Pro Forma Financial Information
19971998E1999E2000ERevenues614,00022,780,00038,800,00053,335,000Direct Costs607,0001,103,00036,021,00050,692,000NET INCOME (LOSS) 7,0001,677,0002,779,0004,643,000Net gain (loss) per share-0-.21.35.58Average # of shares outstanding3,646,2008,000,0008,000,0008,000,000
INVESTMENT CASE AND OUTLOOK
Aggressive Management. H&R’s management is obviously very knowledgeable about emerging opportunities and seems to be very well connected in Canada, the U.S., and overseas. When one studies H&R’s recent acquisitions, a question is posed, "Was everyone else sleeping?". Management’s connections have served the company well, and, we suspect, will continue to do so. We also like management’s diverse backgrounds, which include accounting, strong computer/hi-tech knowledge, and operations, which, to us, are vital in running a holding company. However, what impresses us the most is management’s aggressiveness and the speed in which they have been able to fulfill their objectives.
Unique and Diversified Acquisitions. H&R’s acquisitions are not glamour companies, ala LVMH, but each of them is a unique niche business with a fascination all its own. We are also pleased that H&R has not become top heavy in one industry group. There is absolutely no similarity among the company’s interests in vending machines, financial discounting, leasing, franchising, and real estate. This diversity generally assures that H&R will not be prone to cyclical economic conditions.
Low-Risk Acquisitions. Providing H&R can maintain its funding requirements, there does not appear that the company has risked a great deal in its purchases. All H&R acquisitions were closed mainly through equity funding, and when one looks at what H&R has received in return, the company’s current $1.4 million in long-term liabilities seems extremely manageable.
Good Cash Flow. Emerson’s factoring business and Capital Hill’s vending machines virtually assures H&R of continuous, if not healthy, cash flow. In fact, Emerson is expected to show minimum annual returns well in excess of 40%. The vending machines, now numbering 400, are projected to total 8000 to 10,000 by year 2000, and we can only conjecture what sort of cash flow they are now generating, and in the future. And let’s not forget about Colombo’s, which could number 50 to 60 retail cigar stores by the end of 1998, and the potential cash flow that those stores could generate.
Asset Play. Emerson and Capital Hill should not be dismissed for their assets, but the crown jewel in H&R’s asset arsenal is Quail Ridge, and this is substantial. Not only does H&R expect Quail Ridge to garner after-tax earnings of $10 million, the net effect of this transaction is that it immediately adds $6.00 of net book value per H&R share. An asset this considerable, and one that is a "hard" asset, provides investors with a great sense of comfort.
Potential For Explosive Revenues and Earnings. The Pro Forma on the top of this page is from H&R. These are their projections, and given what this company has achieved to date, we have little reason to doubt them. Their estimates call for nearly a 50% increase in revenues per year for the next three years, and a similar percentage growth in earnings. This Pro Forma was compiled prior to the Quail Ridge acquisition. H&R estimates that Quail Ridge will increase H&R's net earnings by $1.00 per share for the current fiscal year.
Depressed Stock Price. H&R had a high of $5.12 and that was prior to its acquisitions; the dilution of shares perhaps caused concern. Today, the stock is trading at half its high, and the company's cash flow, assets, and potential revenues do not justify its current low price. Factoring in the $1.00 net earnings per share from Quail Ridge would give H&R an EPS of $1.20 for the current FY. Using a multiple of only 13, usually given to insurance and holding companies, and the stock price theoretically, if not literally, should be at around $12 to $14. It is under this premise that we feel comfortable with our one-year target of US $5.50 to $7.00 and two-year target of US $7.00 to $10.00.
For additional information on H&R Enterprises, call Alexander Troy Consultants, the company's investor relations consultants, at 888-207-9476.
This report prepared by:
George T. Schlieben, Publisher
Global Penny Stocks
Box 372
Yardley, PA, 19067
pennystock.com
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