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AIM listed recruitment group Rethink (LSE:RTG) has not covered me in glory to date. I tipped the shares at 9.125p in May 2011 and today, after a profits warning, they stand at 7p valuing the company at £6.7 million. Okay there have been a few dividends along the way but this is a valid chance for my cross-dressing critics to have a pop at me. But I have just had a quick drink with CEO Jon Butterfield (Floreat Floreat Schola Warwicensis) and I believe that the market has over-reacted and the shares are dirt cheap – this could be an excellent recovery play among the penny shares.
Rethink’s interims came out this morning. Revenue increased by 28.2% in the six months to June 30th 2012 to £44.1 million, gross profit came in at £10.4 million (up from £7.8 million) while pre-tax profits came in at £300,000, down from £400,000. There are two points to note here. Firstly Rethink is always heavily second half weighted. Secondly the company has invested heavily in building its contractor base up to c900. These folks do not start to make a positive bottom line contribution for a while so this year was always going to be more heavily second half weighted than usual.
Net debt at the half year was £8.3 million, the same as 12 months ago. This is actually debt in the form of invoice discounting against invoices issued to blue chip firms. It is how recruitment firms operate. The actual cash position is positive and should be c£1 million by Christmas.
And now the profits alert. Jon warned that “post period end, in July and August, we experienced an unexpected decline in permanent revenues within the Recruitment Division. Despite activity having since returned to expected levels, our results for 2012 will be impacted, and we therefore expect full year results to be substantially below current market forecasts.”
At least he did not try to blame the Olympics. What is clear is that this was a blip. It is now corrected. But having been expecting a pre-tax profit of c£1.7 million ( or a tad more) for the full year I am now looking for £1.3-1.4 million. That is a pain in the neck. So too is the scrapping of the interim payout. However I am led to believe that the final payment of 0.233p will be held.
What is interesting is next year when profits should fly ahead. Assuming that there is no repeat of the June/July blip the base ( this year is £1.7 million). But add back the £2 million of costs (contractors) taken on this year which are only now starting to make a positive contribution and we are looking at a calendar 2013 pre-tax forecast of £3.7 million. On a normal tax charge that puts the shares on a 2012 PE of 6.5 falling to 2.3. Assuming that the final dividend is held, a 3.3% yield is a bonus.
I have suggested for a while that Jon should look to merge with another small cap recruiter to get economies of scale and a market cap that attracts fund managers. He is the biggest shareholder and so at 7p he is in no rush to deal but I am pretty certain that at some stage Rethink will get involved in industry consolidation. Meanwhile on such a low rating this has to be a strong recovery buy.
