Staffline Group “good organic growth rate and platform is in a good shape” says Zeus Capital (LON:STAF)

Recruiting

Staffline plc (LON:STAF) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.

Q1: Mike, first off, can you just tell us a little about Staffline Group and what makes them unique?

A1: We do see the company as being a unique platform. It’s got both recruitment and outsourcing revenues streams and we think they’ve got very strong market position in the three key areas.

First area, Recruitment GB, what the company is known for really is the UK’s largest provider of blue collar temporary service staff and with servicing around 400 we call it onsite work locations and 40 onsite driving locations as well. So this is a fairly defensive area in the market and that has a very clear market leadership there.

They’ve also got recruitment business in Ireland as well, and that business has got a very proven track record of delivering. We think there’s significant opportunities for growth there as well, public sector there alone is a 1 billion market opportunity. The Republic of Ireland, we think the market opportunity there is worth 2.5 billion as well with the company having a small market share.

The third element of the group in PeoplePlus, the company is a leading provider of employability programmes and skills training and they’ve got a very, very strong big pipeline there as well. We think there is some good opportunities through this business for them and their recruitment business to grow and deepen employer links as well so they do work with some very strong blue chip client base across the group.

So, you’ve got a recruitment business where we think the quality of earnings will improve as they’ve move more into permanent recruitment, and we see better margins, high cash generation, but we’ve got very strong revenue visibility via its PeoplePlus business as well and we don’t see a platform quite like this in effect.

Q2: So, what can you tell us about your forecast for the group?

A2: Our forecasts for ’21, company gave some decent guidance for ‘21 and our forecast really reflect that. Going into ’22, we’re expecting about 5% revenue growth, 14% growth in underlying profit as well and that converts to a 13% conversion ratio from gross profit.

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We do see further scope from improvement on that metric going forward as well and we see good growth going into 2023. We do have an element of visibility but also clearly, with recruitment, visibility can be a little bit lower but we think with its markets share characteristics etc. and market position, we’re comfortable with the projection.

Q3: How do you see the outlook then for the group?

A3: So, the group traded really strongly in 2021, they delivered multiple upgrades, both in terms of profitability and cash flows during ‘21, despite the macroeconomic headwinds that we saw. The company has done a great job with the balance sheet as well, they’ve really transformed that balance sheet, worked really hard to reduce the debt and indeed they’ve in a net cash position, or they will be at the end of the year.

We do expect them to invest in working capital to deliver growth, we think that they will go back into a very controllable net debt position but they’ll get the growth payback from that in our view as well.

So, I think from an outlook point of view, clearly, there will remain economic headwinds but the group has proven its ability to navigate through that with its platform.

Q4: And just in terms of valuation, how would you view Staffline Group?

A4: We think the valuation’s modest, it’s trading on the PE of about 13 to 2022 and I think that’s low for a recruitment and professional services business, where we would characterise the company.

In the note, we’ve looked at various valuation techniques; DCF and we’ve done a risk adjusted blue-sky earnings valuation as well and we arrive at evaluation 99p share, which is 70 odd percent upside from current levels.

We do think they’ve got a strong balance sheet and there is the potential for M&A further down the line and /or any other capital allocation events, and we’ve not factored that into our valuation as well.

So, the company’s got a good organic growth rate, the platform is in a good shape and we think the current multiples based on our current projections look below in the context of their recruitment specialist services.

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