2% LFL growth in NFI albeit at lower margins
Gattaca is the UK's #1 specialist engineering and #5 technology recruitment agency, providing contract, temporary and permanent staff (source: Recruitment International). It derives 18% of NFI overseas (excluding international placements supplied from the UK), and circa 72% from temporary contractors (9,500 on assignment), with the remaining 28% coming from permanents.Yesterday’s trading update from Gattaca (1 day earlier than expected) revealed healthy cash inflow with net debt closing Jan’18 at £37m (vs £40.3m in July) alongside encouraging overall NFI progression, up +2% to £39.8m vs -4% FY17 (constant currency). The latter driven by UK Engineering (+3%, £24.1m), International (+7%, £7.3m - eg Texas/Hong Kong) and permanents – but partially offset by continued weakness in Technology (-5%, £8.4m) especially Telecoms infrastructure.
Gross margins, however, dipped mainly due to competitive pressures which, on top of higher staff/support expenses, means that we estimate H1’18 adjusted PBT broadly declined to around £6.5m-£7.0m (vs £7.4m LY). As a result, the Board is now right-sizing operations and resetting the bar in terms of FY18 PBT – predicted to come in at “15% below (or £14.8m) previous expectations†of £17.4m (vs £16.2 LY) on NFI of approx £80.5m.
Some of these cost reductions will benefit H2, with the aim of ultimately saving perhaps north of £2.0m pa, at a one-off cost of ~£1m. Similarly the dividend payout is being re-aligned to reflect a more sustainable yield (CY 5.3%) - equivalent to 2x cover (vs 1x statutory EPS LY) to help trim net borrowings (estimated y/e July’18 at £42m).
With regards to personnel, CEO Brian Wilkinson has resigned with immediate effect, with a successor now being sought from in/outside the organisation. In the meantime, Chairman Patrick Shanley is working closely with COO Keith Lewis, CFO Salar Farzad and the wider Executive team, to ensure the NFI momentum is maintained.
Factoring all this in, our valuation decreases from 380p to 295p/share – nonetheless still offering considerable potential upside on successful excecution, both on an absolute and relative basis. We look forward in hearing further details at the interims on 19th April.
Gattaca is an engineering and technology recruitment solutions company. Co. operates in the STEM markets (science, technology, engineering and maths), all sectors with skills shortages. Co. has three reporting segments, Engineering, Technology and International. Co.'s brands are Matchtech, an engineering recruitment specialist; Networkers, a technology recruitment specialist; Cappo, Provanis, Barclay Meade, a professional services brand, recruiting finance, procurement, sales and HR professionals., and Alderwood, which is involved in placing trainers and assessors with training providers throughout the U.K. and the Middle East.
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