logo

Staffline Group PLC: Structural growth – interesting entry point

Writen by Ed Stacey

Structural growth – interesting entry point

DYNAMIC GROWTH PROFILE

Staffline (LON:STAF) is a leading outsourcing organisation, operating mainly in the UK and Eire, through two divisions – Staffline Recruitment and PeoplePlus. The shares have been one of the top growth plays in the staffing services sector in the last 15 years, but are currently trading at a discounted valuation.

RECRUITMENT DIVISION – CONTINUED GROWTH

Staffline Recruitment is a leader in the UK and Ireland in industrial temporary staffing, with strong positions in industries including the food industry and distribution warehouses, serving customers including Tesco, Marks and Spencer, and 2 Sisters Food Group.

A major differentiator for Staffline in this space is its level of employee engagement, connecting with the workforce via interfaces including a unique digital app. Staffline offers fast, flexible, and continuous employment to its employee base; by retaining a large and motivated workforce, Staffline is able to provide a reliable and high-quality resource to the industrial customer base.

These attributes have enabled Staffline to keep gaining market share, underpinning a 9.5% organic growth in recruitment revenues in FY2017.

PEOPLEPLUS DIVISION – TRANSITIONAL PHASE

PeoplePlus is Staffline’s employment support and training business. Major revenue streams include back-to-work schemes for government and local government bodies, private sector apprenticeship schemes, and rehabilitation work in the justice system.
The PeoplePlus business has been implementing the winding down of one major scheme – the Work Programme. On page 2 we present some detail of how this is reflected in our financial forecasts.

The PeoplePlus business has been implementing the winding down of one major scheme – the Work Programme. On page 2 we present some detail of how this is reflected in our financial forecasts.

STRONG FINANCIAL PERFORMANCE – DEPRESSED VALUATION

Staffline has delivered strong financial performance in the last 15 years, with average revenue growth of 25% p.a., and operating profit growth of 26% p.a. Details of the track record can be found at www.stafflinegroupplc.co.uk/investor-relations/investment-case/

The shares currently trade on a 2018e P/E of only 8.3x. On p2 we present some context for this valuation, as a gauge to the potential upside as earnings growth re-accelerates.

The chart above left shows the exposure of the PeoplePlus division to its different operating segments. Details of these segments can be found on the Staffline PLC website. The Work Programme is the project that is winding down. This is a back-to-work scheme that was earmarked at the start of 2017 for phasing out by the UK government due to improving labour market conditions. The other segments continue to deliver stable revenues for Staffline, with opportunities for growth going forward.

The chart above right shows our estimate for the impact of the Work Programme wind-down on the group’s gross profits. We note that we still expect group net income to grow, by 3% in 2018 and 6% in 2019, due to lower operating costs and finance charges. Overall we believe that the scope of the impact of the Work Programme is fully reflected in our forecasts and in consensus forecasts.

The shares now trade on a price/earnings multiple (P/E) of 8.3x (2018e). The chart below shows how this valuation multiple has varied over time. We believe that the share price devaluation is due to the slowdown in earnings growth in 2017-2019e due to the Work Programme. We note that earnings growth also slowed in 2012 and in 2008/09, leading to a P/E derating on those occasions also. Investors who bought in January 2009 achieved a 224% return over the next three years, while buying in January 2012 delivered a 334% return over three years. We argue that current valuation on Staffline shares merits investors’ attention.

 

Important – Please read this information: This report has been commissioned by Staffline and prepared and issued by Capital Network for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however, we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Capital Network at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. Capital Network does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Capital Network’s solicitation to effect, or attempt to effect, any transaction in a security. This document is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Capital Network has a restrictive policy relating to personal dealing. Capital Network does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Capital Network may have a position in any or related securities mentioned in this report. Capital Network or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Capital Network within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Capital Network, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication.

Latest Research