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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.

 

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