SIF Folio: Staffline Blames Brexit For Profit Crash But Are There Other Issues?

21st May '19 by Roland Head

11 comments 4518 reads

I had a very interesting time at Mello London last week. But my Friday morning didn’t get off to a great start when SIF stock Staffline (LON:STAF) issued a massive profit warning.

This week I’m going to look at what’s happened to this blue collar recruitment specialist and what I’m going to do next. I’ll also include some brief notes on a few of the companies I saw present at Mello.

STAF blames Brexit

Staffline rolled out the excuses on Friday, slashing 2019 profit guidance by nearly 50%. The shares are now down by about 60%:

The firm says that Brexit uncertainty has caused employers to shift a large number of temp staff into permanent roles. Although this may be good news for the employees themselves, it’s bad news for Staffline, which has lost a significant number of lucrative temp contracts.

The company says that many of these ‘temp-to perm’ transfers have been in the “higher margin driving sector”. That makes sense to me. The UK is said to have a shortage of lorry drivers. According to one press report I’ve seen, about 60,000 drivers employed by British firms are from Eastern Europe. Putting them on permanent contracts is presumably a measure designed to enable them to remain after Brexit.

Is a cash crunch possible?

I was much more concerned by the second item in Friday’s update. This warned of “a slowdown in new contract momentum” which management attribute to the delayed publication of the firm’s 2018 accounts.

As Paul commented on Friday, it seems odd that companies wouldn’t sign up a temping agency because its accounts were delayed. However, I can see that clients might avoid signing new contracts if they were concerned that Staffline might be facing problems. This is purely speculation on my part, but I wonder if there’s a risk of a cash crunch here.

On Friday, an updated broker note on Research Tree suggested that full-year net debt could hit 3x EBITDA in 2019. I don’t know what Staffline’s banking covenants are, but I wouldn’t be surprised if this was close to the limit of what the firm is allowed to borrow. It’s certainly above my preferred maximum of 2x EBITDA.

This firm has historically been a cash generative business:

However, it…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Blissgull

21st May '19

When a contract worker takes a permanent job at the company they are working for there is usually a commission paid to the agency. Most employment agencies welcome this, it's quite lucrative for them.

andrea34

I'm afraid that I feel the writing has been on the wall with Staffline (LON:STAF) for quite some time, with one catastrophe after another as well as lacklustre trading results. I much prefer Pagegroup (LON:PAGE) (I hold) which has recently made a positive trading update and, I feel, has a much more global presence.

I have held Marshall Motor Holdings (LON:MMH) for a long time, though I have traded in and out and my current holding is residual. I feel they are the best of the bunch, but at the present time I think trading is very tough and now is not the right time to accumulate any more.

Roland Head

Hi Blissgull,

That's interesting, thanks for highlighting this.

Roland

Andrew niven

Ouch after bilby, although those shares seem to be improving

Trident

I think perhaps people may also be under estimating legislation that is being brought in by the Govt in 2020 for private contractors, and the measures companies and agencies have to go through to prove to the Revenue they are not in effect disguised employees.

Whilst this should not in principle technically affect temps hired through agencies, agencies in their t&c's will usually try and pass on the risk of any tax liability to the employer, so there is reduced benefit to companies, and increased risk, so it may be easier in a tight market just to employ those people directly.

Hi Andrew,

Indeed, I seem to be suffering a bad streak at the moment with Bilby (LON:BILB) and Staffline (LON:STAF)

I guess what this does show is the value of diversification and position sizing. Even though I closed SIF's Staffline position at a 74% loss, this only represented a hit of about 3% to the whole portfolio.

SIF positions are sized to allow for 20 stocks. Although I've been below this target for a while now, I'm happy I've maintained this sizing discipline and allowed the cash balance to build.

Best,

Roland

matylda

This is true but on the downside - It's a one off !

Yes, but the point is, it does not seem to explain a downturn in current year revenues and profits which should receive a boost from the placement fees, whatever the long term effect.

AnonymousUser634161

22nd May '19

Revenue from a one-off perm placement is multiple of temp revenue. As such this year should have seen a bump in perm revenues with the obvious drop in future temp revenues. Also, perm revenues are free from any other COGS, so revenue hits GP, pound for pound (after sales commissions). With this in mind, I am scratching to marry up their excuses with the 50% profit downgrade. I think there are more profit (potentially cash) warnings down the line.

23rd May '19

Hi roland,
We all have those times. I was tempted into the falling knife syndrome and bought in with bilby close to bottom when they hit 25p going against all of my rules. However it worked out somewhat as
I sold out today at 46p , but still licking my wounds .
Like your blog very much and good luck for the future

24th May '19

Hi Andrew,

Thanks and congrats on Bilby (LON:BILB), good timing!

Roland

SIF Folio: Staffline blames Brexit for profit crash but are there other issues?

STAF blames Brexit

Is a cash crunch possible?

Unlock the rest of this article with a 14 day trial

About the Author

Roland Head

11 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...