Monday, September 3, 2012
Mon 3 Sep - STAF, KFX, CUP
Good morning. Today I shall be concentrating on Staffline (STAF), the recruitment & out-sourcing company which has issued interims today (please note I hold a small number of STAF shares). I shall be attending their private client broker lunch today, and will report back either tonight or tomorrow on how the meeting with management went.
Mkt cap is £54.3m at 237p a share.
The reason I hold shares in Staffline is simply because I think the shares are cheap! It looks a good company on a low valuation, which during a time of depressed economic activity means that it could look very cheap once the economy recovers, as it will at some point (we just don't know when).
Turnover has risen strongly, but the gross margin slipped from 11.8% to 9.3%, resulting in flat operating profit before amortisation of £3.8m. A couple of points to bear in mind - the fall in margin is due to known factors - start-up losses on new contracts, and investment in their welfare-to-work division, which is working for the Govt on a payment by results model (so initial losses are expected).
Most importantly, they reiterate expectations for the full year, and given that it's an H2 weighted business, this should mean profit of £10.3m for calendar 2012, EPS of 34p, so that puts the business on a rather cheap PER of 7 times, and a divi yield of 3.1% (with 7.4p expected for the full year).
Even though it's a group growing by acquisition, they only have net debt of £8.4m, which is less than 1 years profit, so doesn't concern me.
Most smaller recruitment companies are cheap, but at the moment Staffline is my favoured pick from the sector. To my mind the company warrants a valuation of a PER of about 12, hence that implies potentially 408p target share price, as opposed to 237p currently. Nice upside, and I don't see much risk here, other than the usual sector risk of clients going bust, legislative changes, etc. Although the wind is blowing in the right direction on that front, because it's precisely the never-ending waves of employment legislation from the EU which are driving businesses to instead use out-sourcing (thereby circumventing a lot of the problematic rules). As usual well-meaning Govt & EU interference has the opposite effect to that intended (i.e. making jobs less secure, when trying to do the opposite). Will they ever learn?
There's an excellent, punchy, one-page broker note from Liberum Capital here on Staffline's website;
In my opinion that's exactly how it should be done - keep broker notes as short & sweet as possible, just giving the key opinion, and key numbers, all on one page. It would save so much time if more broker notes were done like this.
Software company Kofax (KFX) ended their year with a flourish, with decent Q4 figures announced this morning. Might be worth a look, as the valuation seems undemanding for a potentially exciting growth company (if that's what it is, I haven't looked in enough depth to find out, but the Q4 figures look good enough to make me take a look later).
Another company I've always liked the look of, but never got round to buying any, is online dating company Cupid (CUP).
It's a sector that is coming out of the shadows, with online dating now being so popular that it's no longer seen as disreputable. Plus of course people are prepared to pay, in order to find their soul mate.
On the downside, a bit like online gaming, there is a constant churn of customers, meaning that high marketing spend is needed to constantly replace customers who drop out of the system.
Strong top line growth is reported, and interestingly it's mainly organic, driven by "intelligent and targeted marketing spend".
However, at the EBITDA level it's only flat. Nice strong balance sheet with net cash.
They generate most of their profits in H2, and weight marketing spending into H1, hence results are lop-sided. They reiterate expectations for the full year, which are 15p EPS (double that of 2011!), so this puts the shares at 207p on a PER of 13.8 - looks cheap to me for a company growing organically at such a rapid rate.
Run out of time, that's it for the moment, have a good day!