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I recommended this on my Nifty Fifty website last week at a mid price of 259.5p. The shares are up by a few pence but are still a strong defensive long term growth buy.
Investment Case: Shares in AIM-listed provider and manager of industrial workforces in the UK, Staffline Group (LSE:STAF) are a successful recommendation from the website I previously worked on – I recommended the shares on t1ps at 77.5p in March 2010 and the current ‘bid’ price is 256p, with the ‘offer’ price 263p. However, the current share price still looks to fail to reflect the defensive growth on offer here. The shares continue to trade on a lowly rating despite the industries in which the group specialises – principally food processing – meaning it is much less affected than recruitment related sector peers during tough economic times such as these. I consider a current share price of 350p+ easily justifiable and, at up to 275p, the shares continue to look a solid value growth buy. With the company currently capitalised at £61 million, shares in Staffline Group are a defensive-growth buy
Operations: Staffline specialises in providing workers in the areas of food processing, manufacturing, e-retail, driving and logistics and supplies up to 25,000 blue collar workers each day. It operates an ‘OnSite’ offering – recruiting, training and managing temporary workers from a customers’ own premises – as well as brands including Staffline Express (High Street branch operation), Elpis Training (national training and consultancy organisation), OSP (specialist volume recruitment call centre) and Eos (a welfare-to-work provider).
Management Incentive: The key man is Chief Executive Andy Hogarth who joined the business in 2002 having held senior roles in a wide range of businesses within retail, support services, healthcare, hospitality and construction. He has 2,068,629 shares in the company (9.04%) and his basic salary in 2011 was £186,000, with a £98,000 bonus. In AIM terms that is far from excessive. Hogarth is a good chap. Solid, dependable and 100% focussed on Staffline.
Financials: The company’s half 2012 calendar year results showed an adjusted pre-tax profit of £3.59 million on revenue of £163.92 million, generating earnings per share of 12.4p. The profit was slightly lower than in the comparative prior year period (£3.74 million) as an increase in profit in the core recruitment business was offset by a combination of start-up costs on a number of contracts and anticipated losses from within the company’s welfare-to-work division. However, Staffline noted that the trading performance of that business was “slightly ahead” of its estimates and that it remains confident that the business will make a positive impact on group profitability in 2013. Net debt at the period end totalled £8.39 million, with net current assets increasing by £2.20 million during the period, to £7.32 million, and non-current liabilities reduced by £1.09 million, to £5.88 million. The results statement emphasized that the board “remains confident that the group will meet current market expectations for the full year” and its confidence was somewhat reflected in a near 7% increase in the interim dividend (to 3.1p per share).
Risks: A key risk is legislative. Onerous changes in the regulatory framework have the ability to greatly increase the costs of, and could resultantly lead to reduced demand for, temporary workers. Additionally, the company’s move into the welfare-to-work segment increases its exposure to government policy and decision making. However, the challenging macro economic outlook means a government focus on encouraging people off welfare and into work looks assured and there are only a limited number of providers who meet the criteria to secure such contracts. There is a risk with the Eos business that it is unable to find sustainable jobs for jobseekers but given Staffline’s other, recruitment services, segment the company should prove ideally placed to find such jobs.
Valuation: Staffline’s house broker, Liberum, has forecast full-year earnings per share of 34.5p for calendar 2012, rising to more than 40p next year. This suggests a prevailing earnings multiple of 7.7, falling to less than 6.6. Given the anticipated earnings growth of 16%+ and that the company’s focus on delivering operating efficiencies in ‘blue collar’ work to client organisations (whilst enabling them to focus on managing their core businesses) continues to prove an attractive proposition in the prevailing economic climate, such ratings continue to look too harsh.
On the earnings numbers stated a share price of more than 350p is easily justifiable – and I expect organic and acquisitive growth to continue from there. There is also a dividend stream to consider – with a forecast 7.6p per share payout for 2012 (a 2.9% yield), forecast to rise to 8.9p for next year (3.4% yield).
Assuming that no acquisitions are made debt could be cleared within twelve months. If there are no acquisitions the company could, and would, buy back shares to accelerate earnings growth. But my money is on Hogarth using cashflows for small bolt-ons. He has a cracking track record in this area and that offers upside risk to earnings estimates and thus my target price.
At up to 275p, these shares continue to look a solid value growth buy and that is what you should do at 264.5p.
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