Staffline Group Plc (ISIN GB00B040L800) -Growth machine or Brexit victim ?
Due to the well-known Brexit troubles in the UK, my contrarian instincts seem to motivate me to look more at UK companies these days. One of the UK companies on my watchlist was Staffline Plc, a recruitment and “human resources outsourcing company”.
The company got on my radar screen because friends mentioned that it looks like an interesting company and that the have a “great CEO”.
Those are the usual multiples:
Market Cap 232 mn GBP
P/E 2015: 15,6
P/E 2016: 7,4
The company grew sales almost 10-fold over the last 10-12 years. Interestingly however GAAP EPS in 2015 was at the level of 2006.
The share price shows nice growth over many years but a significant draw down (.50%) from the top in November 2015 (so the drop began before Brexit):
In principle, an asset light service company at single digit P/Es could be quite interesting.
As always I start my research with reading the last annual report.
However pretty soon I discovered a couple of things I didn’t like at all such as:
– only adjusted numbers on page one (no GAAP)
– sales growth ambition (“biggest”)
– many acquisitions in 2015 (and the years before)
– “bullshit vision” statement
– concentrated customer base, little barriers to entry
– “adjusted EPS” target for bonus plans
– declining cashflow
– management stock plan with automatic cash conversion (no long-term ownership)
– not really good returns on capital
– “roll up”
On the plus side I only found those points:
+ relatively low base salary for management
+ good organic growth in 2015
+ relatively cheap based on 6M profit
+ they try to be the “trusted temp worker agency”
The CEO Andy Hogarth
Andy Hogarth seems to be an interesting person with an unusual background as this article lines out.
I also watched this video interview with him:
One thing becomes very clear: They are very focused on making acquisitions and there is very little talk about return on investment etc. but about market share and international expansion.
What I didn’t find very reassuring is the fact that since 2008 he sold around 50% of his shares. His stake dropped from 14,85% in 2008 (3.1 mn shares) to 1.6 mn (5,8%) now.
Staffline as a direct major Brexit victim:
One of the question is of course how someone who “rents out temporary employees” is affected by Brexit. In Staffline’s case I found this statement quite interesting:
The introduction of the National Living Wage (“NLW”), which will increase the minimum wage from the current £6.70 to £7.20 in April 2016, will no doubt start to encourage more people to enter the labour market. The further increases due to be introduced in the period until 2020 when it is set to be at least £9 per hour are also likely to further encourage not only current UK residents to enter work but also to further encourage people from Eastern Europe to come to the UK, supporting our growth and increasing the supply of labour. Current levels of NMW for unskilled workers vary across Europe, from £7.11 in France, £6.29 in Germany, £6.09 in Austria, £3.38 in Greece, £1.84 in Poland and £1.42 in Lithuania. Whilst this significant increase in UK wages may encourage an increase in migration from Europe it is likely to further widen the supply pool of labour, thus helping Staffline to continue to grow.
Staffline has several offices in Poland. I haven’t s seen more information within the annual report, but my guess is that part of Staffline’s past success was “importing” workers from Eastern Europe to UK.
In the 6 month report t to increase the dividend by 40hey say the following:
BrexitAt present, it is less than a month since the citizens of the UK voted to leave the EU.In that short period we have not seen a reduction in demand for our services or in availability of contractors. Whilst it is too early to tell what the long -term impact of Brexit may be, as the market-leading provider of temporary workers, our scale and capability has enabled us to manage a gradual tightening of the labour market and gives us confidence that we will continue to do so. Staffline benefits from a reliable workforce of over 263,000 available contractors on our database. Furthermore, any tightening in the labour market is also likely to help the Employability side of our business as this may make our Work Programme candidates easier to place.
So there seems to be some “natural hedge” with their social welfare business but overall I do think that lower economic activity in the UK is clearly not good for Staffline and their old core business will potentially suffer quite significantly. For me this is very different from a case like Majestic which only is exposed to secondary effects.
What really irritated me was that they announced to increase their interim dividend by 40%. I think the intention was to show (short term) confidence but in my opinion this doesn’t look like smart capital allocation.
Summary / Applying the filter
At that stage, Staffline has already been “filtered out” and I won’t analyze it deeper. There is a relatively high uncertainty about their future business prospects, they are directly impacted by the Brexit in their core business.
On top of that I don’t like roll ups as I find it very difficult to understand any year to year numbers with so many acquisitions. For me, the CEO is also too focused on sales growth. There is of course the chance that they successfully grow further, but the risk is also that they hit the brick wall at some point in time.
So time to move on to some other (UK) stocks….