Looking at Sthree and Van Elle Holdings

Sunday, Dec 03 2017 by
11

Been looking at a couple of companies, thought I'd share my research here, see if people agree with my findings:

First, Sthree.  Sthree provides staffing in the STEM industries, and has been growing steadily over the years, revenue in the last annual accounts at near double what it was in 2010 (960m vs 475m).

However, while operating profit has shown a similar jump between the years 2010 and 2016 (£20m vs £38m), that growth has not been as consistent as the revenue growth.  Revenue has grown every year, while operating profit has been up and down, being down at £16m in 2013, and peaking at £39m in 2015.

The reason for the inconsistent operating profit growth is a mixture of a downturn in the recruitment markets which occurred during the down years, and exceptional costs which were the result of investing in the continued diversification into international markets.

When a company invests in new markets there are always going to be exceptional costs, so for a growing company I would say these exceptional costs are the norm.  Also, the recruitment market is historically up and down, so I would say the inconsistent profit growth is likely a norm for this company.

So what about the dividend, this has been flat for the entire period, which is not great.  Though at the current share price the yield is around the 4% mark, which for a company with such a history of strong growth is promising.

Also, despite final year operating profit having fallen a little last year, in the first half of this year it was back on the up, with 5% growth.  And the consensus for the year ended 30 November 2017 is £42.4m, with a range of £39.3m to £45.6m.

Also, continued progress has been made on the diversification from the business's UK roots, with company CEO Gary Elden stating:

"The growing breadth and scale of our international operations, which now account for four fifths of gross profit, underline how far the Group has grown from its UK roots, with particularly strong performances in Continental Europe and the USA, which is now our second largest region.    "Our strategic focus on Contract business continues to deliver good growth across almost all regions, as well as a greater resilience in more uncertain economic conditions. Our Permanent business made good progress in increasing productivity and remains focused on achieving further gains in the balance of the year."

All of this is promising.  And then there is the balance sheet, current assets at £209m stand at £50m more than all liabilities, which stands at £160m.  And though cash only stands at £14m, borrowings in total only stand at £8m.

So all in all, Sthree are a good company, solid balance sheet, good growth potential, good management.  There is just one problem, the price.  In my view at the current share price of 345p, it is fair value.  To capture my attention really it would  have to drop below 300p, which is where it was at earlier in the year.  In conclusion, I missed the boat on this one.

Moving on, Van Elle Holdings.  Van Elle is one of the leading Piling, Ground Engineering and foundation engineering contractors in the UK, basically they dig up the dirt and lay down the foundations.

Due to the relatively low share price this company did initially catch my interest, they seem to have solid growth prospects, and a good balance sheet, current assets outweighing total liabilities.  Also, they pay a dividend, which at the current share pay yields around the 3% mark.

One thing I did note was that they only listed on the stock market at the tail end of last year, and the current share price at 85p is below the listing price of 100p.  I was puzzled by this as according to the accounts they had made good progress, so I dug deeper and came across this article in the Telegraph, which explained everything.

It's entitled, Van Elle Faces Boardroom Battle as Founder Seeks Return, and the following paragraphs pretty much sum up the problem:

It is understood that Mr Ellis has concerns about the running of the company, and is worried about departures of key staff. Mr Ellis has also raised concerns about Van Elle’s financial forecasts, which do not appear to match internal performance figures seen by The Sunday Telegraph. In attempt to wrest back control of the business, Mr Ellis has written to the company, requiring a general meeting so his plans for the management shake-up can be voted on. As well as Mr Fenton being removed, Mr Ellis also wants senior independent director Robin Williams to step down. Mr Ellis, who has a 6pc shareholding in Van Elle but is understood to control about 20pc of the company, wants investors to vote on him returning as a director.

So basically, there is a boardroom dispute, and considering the accusations being thrown about by Mr Ellis, implying that the financial forecasts are wrong, in the simplest terms I would not touch this company with a barge pole.  The risk is simply too great, the potential reward nowhere near great enough.

Like I say, I am just getting back into the swing of the investment world, so if anyone has any thoughts to offer, happy to hear them!


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SThree plc is an international staffing company, which provides specialist recruitment services in the science, technology, engineering and mathematics (STEM) industries. The Company provides permanent and contract staff to sectors, including information and communication technology (ICT), banking and finance, life sciences, engineering and energy. The Company's segments include the United Kingdom & Ireland (UK&I), Continental Europe, the USA, and Asia Pacific & Middle East (APAC & ME). The Company's recruitment brands include Computer Futures, Progressive Recruitment, Huxley and Real Staffing. The Company's other brands include Global Enterprise Partners, Hyden, JP Gray, Madison Black, Newington International and Orgtel. The Company delivers contract, permanent, projects, retained and executive search recruitment solutions. Its support and mobility services offer contracting, relocation and relevant visa support. It provides resources to support its brands with contractor services. more »

LSE Price
270.5p
Change
-1.3%
Mkt Cap (£m)
358.6
P/E (fwd)
8.1
Yield (fwd)
5.6

Van Elle Holdings plc is a geotechnical engineering contracting company. The Company offers end-to-end solutions, including site investigation, driven, bored, drilled and augered piling, and ground stabilization services. It also develops, manufactures and installs precast concrete products for use in specialist foundation applications. It operates through four segments: General Piling, which is involved in open piling on brown and green field sites, particularly on new housing and new development sites; Specialist Piling, which is involved in installing piles where access to the area is restricted or specialist techniques are required; Ground Engineering Services, which is involved in providing site investigation, soil sampling drilling, grouting and soil nailing techniques to consolidate ground conditions, and Ground Engineering Products, which manufactures and installs modular precast concrete beams, primarily to the new housing market. more »

LSE Price
49p
Change
-5.8%
Mkt Cap (£m)
41.6
P/E (fwd)
6.8
Yield (fwd)
5.8



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13 Posts on this Thread show/hide all

Beginner 4th Dec '17 1 of 13
1

Totally agree on SThree (LON:STHR) . This is priced about right for now, but we could see a fall on the next update (I formerly held here,and sold way too early!!)

All the figures look good at Van Elle Holdings (LON:VANL) .But the boardroom dispute is a worry. I will buy here if it gets below 85. The spread is broad. Overall much of the bother is already in the price, but it is also worth noting the company suggested the rail sector is a possible pitfall in ongoing activities.

Good luck

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Gray Woods 4th Dec '17 2 of 13

In reply to post #248928

"I formerly held here,and sold way too early!!"

As long as you made a profit, that's what matters! Though you think we could see a fall on the next update, any specific reasons why you think this?

And yeah, regards Van Elle the wide spread is another downside, and regards the other point, I had missed that about the rail sector being a potential pitfall, so thanks for pointing that out. Worth noting!

An interesting company, but even below 85 I don't know, something just doesn't sit right with me. Either Ellis is playing games to try to take back control of his company, or there is something not right and he truly feels the need to act. Either or I don't see this being resolved anytime soon.

One to watch though!

Blog: The Lone Wolf Investor
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Redrichmond 4th Dec '17 3 of 13
2

Sthree are a good company having worked through them via my LTD company for years

One thing I would say is check the UK contracting revenue and how much it makes up of the business. STHREE seem pretty diversified but there is a new rule change coming that will decimate the Private UK contracting market

The goverment introduced this rule in the public sector last year and contract revenues fell off a cliff.

I cant see it coming in until 2019 but it will come in and it basically means IT contractors and such wont be able to work through companies like sthree anymore via a LTD.(Without going into too much detail)

Jump into sthree now and robert waters and sell out before the goverment report into "Introducing IR35 into the private sector" comes up in april 2018

https://www.theregister.co.uk/AMP/2017/09/04/80_per_cent_of_it_projects_in_the_public_sector_delayed_due_to_ir35_says_report/


quoted from the budget

"3.7 Off-payroll working in the private sector – The government reformed the off-payroll working rules (known as IR35) for engagements in the public sector in April 2017. 

Early indications are that public sector compliance is increasing as a result, and therefore a possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company.

It is right that the government take account of the needs of businesses and individuals who would implement any change.

Therefore the government will carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms, including through external research already commissioned by the government and due to be published in 2018."


When this law change comes in the outsourcing companies and IT consultancies will be picking up the pieces, they would be worth investing in and just sitting on 




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Gray Woods 4th Dec '17 4 of 13

Accidently posted the same post twice, so see below comment.

Blog: The Lone Wolf Investor
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Gray Woods 4th Dec '17 5 of 13

In reply to post #249018

I did not know about that impending rule change, so thanks for that! Real food for thought there, definitely be interesting to see how the sector reacts to such a rule change. Like you say, when it comes in could present some interesting opportunities.

Though in regards how it might affect Sthree, they are well diversified now, the UK counting for less than one fifth, but still a rule change like this could cause a hit, especially considering Sthree are focusing so much on contract business. And when that hit comes, definitely could be a buying opportunity.

So yeah, thanks for the info! Will be watching them and the sector closely over the next year.

Blog: The Lone Wolf Investor
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Redrichmond 4th Dec '17 6 of 13
1

Interestingly look at the huge director sells from RWA (robert waters) in Oct before the Nov budget when we all thought this ir35 change would happen. RWA is falling hard now.

4 months till march isnt a long time. It could be any time next year that this report is unveiled and the new law implemented

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Redrichmond 4th Dec '17 7 of 13

Look at STHREE over a 3 year period... July 2016... Fell off a cliff . This was when the public sector law change was announced. Fell from 350p to 175ish

https://www.spring.com/spring-blogs/blogs/new-contractor-tax-rules-due-april-2017/

Buying into this now would be as risky as bitcoin (talk of a new anti money laudering new uk law today pulled it down 10%)

These recruitment companies have good business models but a black swan event like a law change will hammer their contracting profits through the floor

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Gray Woods 4th Dec '17 8 of 13

Just checked out Robert Walters, it is interesting to see the director sells come at the point they did, smart move by them.

Still, a solid company and I suspect they will adapt, just will be interesting to see how they adapt, and how far they drop due to the uncertainty brought about by IR35. Considering they were at 340p at the beginning of the year, could be a distance if the belief is profits could be hit badly due to the changes. And looking at the changes, they might be. Hard to gauge the effects really until the companies offer some guidance, which is hard for them to do at this point with the report being four months away.

Also:

"July 2016... Fell off a cliff . This was when the public sector law change was announced. Fell from 350p to 175ish"

That's a very good point! Government is a big factor in recruitment companies. They are great until a law change comes about and forces them to change their business model. Reliant on both the state of the job market and on government keeping things stable.

I do like Sthree though, not at the current price, I'm even more certain of that now. But will keep an eye on them, same with Robert Walters, as if they fall enough might be worth buying as I reckon they have the scope and ability to adapt to any changes in the law.

So thanks for the info, really useful!

Blog: The Lone Wolf Investor
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Beginner 4th Dec '17 9 of 13
1

In reply to post #248938

There has been a trend lately of employment agencies producing underwhelming results (usually blamed on leaving the EU and economic uncertainty) and a consequent drift down in price (eg Harvey Nash (LON:HVN) and Gattaca (LON:GATC) ) and I cannot see SThree (LON:STHR) bucking this. Hold tight for 260 or so!

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Gray Woods 4th Dec '17 10 of 13
1

In reply to post #249063

Yeah, I'm thinking you're right. Possibly even lower with this IR35 RedRichmond highlighted. Definitely think the sector is one to keep an eye on though, as very likely to be opportunities ahead. So defo hold tight and watch closely!

Blog: The Lone Wolf Investor
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Gray Woods 21st Dec '17 11 of 13

Comment posted twice for some reason, and can't work out how to delete, so see below comment.

Blog: The Lone Wolf Investor
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Gray Woods 21st Dec '17 12 of 13

So I see Van Elle Holdings (LON:VANL) got some good news last week, a complete rejection of Ellis's proposed resolutions, but the fact he still plans to hover about in the wings is not great. Shame, as it is a solid looking company. Reading between the lines, namely from the fact that he wanted his son-in-law to be on the board, he perhaps does not like the way the current board are taking the company, and so wants to take back control himself to alter its path.

Conjecture of course, but whatever his true reasoning, as long as the threat lingers Van Elle are going to linger in the doldrums one would think.

Blog: The Lone Wolf Investor
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Merlotman 16th Mar '18 13 of 13

Thanks to Redrichmond for sharing your experience in the recruitment market and raising the relevant point about IR35. However I take some comfort that the UK accounted for only 19% and falling of SThree (LON:STHR) 's GP in 2017 and ICT was 56% of total. Even if there was no Perm ICT contracts the max exposure to UK ICT is therefore 11% of GP. In addition SThree (LON:STHR) seem to be addressing the IR35 issue via their ECM model but there are no specific numbers on rollout as yet. I am long and may add once effect of IR35 is clearer.

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