Small Cap Value Report (2 Jul 2015) - STAF, HVN, JSG, LWB

Thursday, Jul 02 2015 by

Good morning!

It's strikingly quiet this morning - very low trading volumes on the basket of shares which I follow in real time. Independence Day weekend in the USA, Greek Referendum, Wimbledon - take your pick for what to blame!

I like this time of year, as thin volumes can create some interesting short term buying opportunities, if someone tries to offload some illiquid stock when there's hardly anyone watching! So I usually pick up one or two bargains over the summer and similarly over Xmas/NY.

Staffline (LON:STAF)

Share price: 1340p (up 1.5%)
No. shares: 27.7m
Market cap: £371.2m

Trading update - this staffing group reiterates its AGM update on 21 May 2015, saying that H1 "trading has been strong and in line with market expectations".

Further comments are that the staffing division has "an excellent new business pipeline".

Its other division, now called PeoplePlus (which operates Government Work Programme contracts) "is making good progress" in the 9 regions where it is the prime contractor.

So this all sounds good.

Valuation - despite the huge increase in share price in the last few years, the valuation (on a forward PER basis) is not outragrous by any means - at 15.2 times forward earnings, as you can see from the usual graphics below.


Look at how strong EPS growth has been. Without wishing to pour cold water over things, as there's no doubt this company has been a big success story so far, I should point out that a lot of the increased earnings has been achieved by gearing up the balance sheet, and making acquisitions funded partly by debt.

Balance Sheet - the last reported figures show net tangible assets are negative, at -£15.8m. Gross bank debt is fairly considerable, at £35.8m, although that is mitigated on the balance sheet date by cash of £18.4m, so net debt was £17.4m.

I think it's more important to look at gross debt, because the year end cash figure is often window-dressed to a level which is atypically high, at many companies.

This level of debt is not alarming, but it's getting towards the top end of what I would say is comfortable.

Share based payments - these look excessive to me, so I am flagging it up. 

In 2014 the company made an adjusted operating profit of £19.4m, but then awarded £3.7m in shares to management. That's nearly 19%…

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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 »

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Harvey Nash Group plc is a United Kingdom-based recruitment business company. The principal activity of the Company is the provision of professional recruitment and offshore solutions. The Company's segments include United Kingdom & Ireland, Mainland Europe and Rest of World. Services provided by each segment are permanent recruitment, contracting and outsourcing. The Company provides executive search, interim management and leadership consulting services. Its leadership services include board evaluations, management development, audits, assessments and strategic human resource (HR) consulting. Its professional recruitment services include technology recruitment business and recruitment solution business. Its offshore services include projects and software services, which provides application development, third party software maintenance and outsourced software services to clients across the world, and managed services/business process outsourcing. more »

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Johnson Service Group PLC is a United Kingdom-based company that provides textile rental related services. The Company is the supplier of workwear and protective wear. The Company operates through Textile Rental segment. The Textile Rental segment is engaged in the supplying and laundering of workwear garments and protective wear; linen services for the hotel, restaurant and catering markets, and high volume hotel linen services. The Textile Rental segment principally consists of workwear garments, cabinet towels, linen and dust mats, are initially treated as inventories. It operates Textile Rental business under the brands, including Apparelmaster, Stalbridge, Bourne and London Linen. Its market workwear rental business, providing a clothing portfolio to the workplace, supported by sourcing supply and aftercare service solutions. Its Johnsons Stalbridge Linen Services offers the laundry service to the hospitality sectors. more »

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

5 Comments on this Article show/hide all

ianmrandall 2nd Jul '15 1 of 5

July 4th...?

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Paul Scott 2nd Jul '15 2 of 5

In reply to post #102214

Doh, sorry, I've corrected the article now. Dunno why I wrote Thanksgiving Day, since I know that's in November, not July! sometimes the fingers get ahead of the brain.

Apologies, Paul.

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Big L 2nd Jul '15 3 of 5

Hi Paul
Interesting chart comparing HVN and STAF - but if you adjust HNV's price upwards to put it on a comparable valuation it wouldn't be far away e.g. on the same EV/EBITDA multiple. Of course different valuations may be justified by faster growth but STAF should be ahead in share price terms due to underlying growth rather than just having been rerated more than HVN. STAF also has further to fall if growth disappoints whereas if HVN can get its act together and growth more it may experience the same rerating, so potentially more optionality on the upside for HVN and mixed/negative optionality on the valuation front for STAF.
I'm long HVN :)

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sealeyd 2nd Jul '15 4 of 5

I held HVN for a while but sold out recently to pursue some other opportunities. Seemed like a quality company who lacked exciting growth prospects but did a good job of managing expectations. Like Big L I suspect that in the long-run it will be an overall winner.

Blog: Storm81
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Metier9 2nd Jul '15 5 of 5

Hey Paul,

Just to add to your above Low and Bonar LWB have been building a factory in china costing £26m and will start production in 2016.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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