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

Tuesday, May 21 2019 by
20
SIF Folio Staffline blames Brexit for profit crash but are there other issues

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%:

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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:

5ce3b86dea567S2.png

However, it…

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Staffline Group plc is a holding company, which is engaged in the provision of recruitment and outsourced human resource services to industry and services in the welfare to work arena and skills training. The Company has two segments: Staffing Services, which includes the provision of temporary staff to customers, and PeoplePlus, which includes the provision of welfare to work and other training services. Its Staffing Services focuses on providing complete labor solutions in agriculture, food processing, manufacturing, e-retail, driving and the logistics sectors. Its recruitment business operates from well over 300 locations in the United Kingdom, Eire and Poland. The Staffing brands include Staffline OnSite, based on clients' premises providing both blue and white collar, out-sourced, temporary workforces. Its Employability includes work program, prime contractor in over nine regions and sub-contracts in approximately five regions in England. more »

LSE Price
150p
Change
 
Mkt Cap (£m)
103.4
P/E (fwd)
2.8
Yield (fwd)
9.3

TClarke plc is a United Kingdom-based building services company, which delivers electrical, mechanical, and information and communications technology (ICT) services. The Company provides electrical and mechanical contracting and related services to the construction industry and end users. Its geographical segments include London and South East, Central and South West, the North and Scotland. The Company's businesses include Intelligent Buildings Green Technologies, Facilities Management, Transport, Mission Critical, Manufacturing Services, Residential & Hotels, M&E Contracting and Design & Build. The Company within its M&E contracting business has capabilities in sectors, including commercial offices, retail, education, healthcare, financial services and media. Its Manufacturing Services business includes in-house precision prefabrication and engineering services. Its projects include Beckley Court, Chiswick Park, Kettering Hospital, Project Nova, Mitie Care Home and Rathbone Square. more »

LSE Price
112.5p
Change
0.5%
Mkt Cap (£m)
48.4
P/E (fwd)
6.2
Yield (fwd)
4.1

The Character Group plc is a toy company. The Company is engaged in the design, development and international distribution of toys, games and gifts. Its geographical segments include other EU, UK and Far East. It designs and manufactures toys based on television, film and digital characters, and distributes these products in the United Kingdom and overseas. It also distributes finished products in the United Kingdom developed by overseas-based toy producers. Its diverse product range includes products for pre-school, boys, activity and girls. The Company's brands include Peppa Pig, Little Live Pets, Teletubbies, Minecraft, Scooby Doo, Mashems, Fireman Sam and Ben & Holly. Its customer list includes the United Kingdom toy retailers, the United Kingdom independent toy stores and a selection of overseas distributors. It operates approximately two distribution warehouses located near Oldham, Greater Manchester. It primarily distributes products sourced from overseas third parties. more »

LSE Price
520p
Change
0.5%
Mkt Cap (£m)
111.2
P/E (fwd)
10.4
Yield (fwd)
5.7



  Is LON:STAF fundamentally strong or weak? Find out More »


11 Comments on this Article show/hide all

Blissgull 21st May 1 of 11
5

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.

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andrea34l 21st May 2 of 11

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.

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Roland Head 21st May 3 of 11

In reply to post #477506

Hi Blissgull,

That's interesting, thanks for highlighting this.

Roland

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Andrew niven 21st May 4 of 11

Ouch after bilby, although those shares seem to be improving

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Trident 21st May 5 of 11
4

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.




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Roland Head 21st May 6 of 11
3

In reply to post #477606

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

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matylda 21st May 7 of 11

In reply to post #477556

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

Blog: Briefed Up
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Blissgull 21st May 8 of 11
2

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.

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hp154 22nd May 9 of 11

In reply to post #477656

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.

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Andrew niven 23rd May 10 of 11
1

In reply to post #477641

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

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Roland Head 24th May 11 of 11

In reply to post #478246

Hi Andrew,

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

Roland

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 Are LON:STAF's fundamentals sound as an investment? Find out More »



About Roland Head

Roland Head

I'm a private investor, analyst and writer on stock markets, with a particular fondness for free cash flow, dividends and value. My main interests are UK and US stocks. I also have an interest in (profitable) commodity stocks.  I have passed the CFA Level 1 exam and hold the CFA UK Investment Management Certificate (IMC). One of my investment interests is developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. In earlier life, I worked as an engineer in telecoms and IT. The rules-based and quantitative approach required for this kind of work undoubtedly influenced my investing style.  I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a very large and now defunct Canadian telecoms firm.  more »

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