Report

Tough 1st half due to challenging conditions

Let’s make no bones about it, the UK recruitment sector has been hit by a ‘perfect storm’ over the past 6 months. Brexit, a snap General Election, delays to major infrastructure projects (eg HS2), falling car sales, a manufacturing recession and lower aerospace orders, reflecting the temporary halt in production of the Boeing 737 MAX.

In fact, we heard as much on Monday, when STEM rival SThree warned that UK NFI had fallen -11% in the quarter ending Nov’19. Similarly today, Gattaca reported that its UK NFI had declined -11% for the 5 months to Dec’19, and now anticipates FY20 adjusted PBT to come in at c. £6m vs consensus of £10m.

Clearly this is disappointing, however it’s not all bad news. Firstly, the lower activity levels mean there is likely to be a working capital unwind this year, which we reckon will reduce FY20 net debt to £25m (or 2.7x EBITDA) vs £30m before. Next, additional cost & cash savings are being considered that would also hold the group in good stead, once this mini Cat-1 squall has blown itself out.

Lastly, we think conditions should improve next year, with FY21 PBT forecast to climb to £10m, closing with net debt of £19.4m (1.5x EBITDA). Sure our valuation drops from 160p to 135p/share, yet equally we believe there is still considerable upside, with the stock (at 105p) trading on a ‘trough’ PER of 7.7x vs 10.4 peers.
Underlying
Gattaca

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.

Provider
Equity Development
Equity Development

​Equity Development enables companies to become better understood and supported by investors. Since our launch in 1996 we have consistently focused on helping our clients improve their communication and relationships with both existing and potential shareholders. Our clients have come from a wide variety of sectors and domiciles, are both private and quoted and range in size from micro-cap to $multi-billions. We offer free access to company research notes written by experienced analysts. These notes include detailed forecasts, financial models and a fair value. We host regular Private Investor Forums at which investors have the opportunity to hear company directors present, and to ask questions. These are free to attend. We broadcast live Webinars with company management that include active Q&A. We also make the recordings available online. We arrange face to face meetings between private investors and company management. We are active users of Twitter, commenting daily on company news, share price moves, Directors’ Dealings, Equity Development Research Notes & Events.

Analysts
Paul Hill

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