Patient investors paid 7.5% to wait
Gattaca is the UK's #1 specialist engineering and #5 technology recruitment agency, providing contract, temporary and permanent staff. It derives 30% of NFI overseas, and 75% from placing contractors (9,500 on assignment), with the remaining 25% coming from permanents.Like most good things, Gattaca’s transition from UK engineering staffer to international recruitment specialist of hard-to-find STEM candidates (Science, Technology, Engineering and Mathematics) is taking slightly longer than anticipated. Not because of any strategic or execution misstep, but largely because of more challenging conditions, which have impacted Net Fee Income (NFI) over the past 3 years. However this ‘demand drought’ will eventually break. And when it does, Gattaca is in our view much better placed to ‘make hay’, underpinned by its wider global footprint, scalable business model and focus on the STEM verticals.
Indeed, in 2016 research by Engineering UK predicted an extra 1.8m engineers and technically qualified staff would be required by 2025, with a 20,000 pa shortfall in the number of students being educated in Britain. Structurally too, investment should accelerate both overseas (eg Trump’s US Infrastructure Bill) and domestically (eg Heathrow, Hinkley Point, Crossrail 2, HS2, smart cities) - augmented by continued spend in engineering, technology (eg Cyber security, IoT, Cloud, 5G, autonomous vehicles) and the adoption of IT/Telecoms within Automotive, Aerospace, Defence, Energy and Maritime.
Perhaps not surprisingly, the overall message was in today’s update somewhat mixed. On the one hand, FY17 reported NFI was up 2% (flat constant currency) to £74.8m (£73m LY) – helped by the £11.5m acquisition of RSL in February. Trading was also said to be “broadly in line with market expectationsâ€, which we interpret as delivering adjusted PBT of circa £16.2m vs consensus of £16.5m-£16.7m. Despite encouraging recent performances in North America/Asia, together with sequential NFI improvements (ED estimates: Q1 -5%, Q2 -5%, Q3 -4% and Q4 -2.4%), we have conservatively shaved our FY18 adjusted PBT from £20.2m to £18.3m, primarily due to ongoing UK uncertainty.
In light of our revised FY18 EPS forecast of 37.5p (vs 41.7p before) our valuation has accordingly dropped to 390p/share (vs 425p before), based on a 9x EV/EBIT multiple, discounted back at 12% and adjusted for net debt. Currently the stock at 305p is trading on low historical FY17 EV/EBITA and PER multiples of 8.0x and 9.0x, whilst paying a sector leading 7.5% yield.
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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