Background and Preamble

Staffline (LON:STAF) consists of two divisions: Staffing (branded Staffline) and Skills (PeoplePlus). It has recently been struggling with minimum wage compliance problems, various accounting issues, delays due to the election, disruption in the labour market due to Brexit and a lack of confidence amongst its customers.

With so many serious investors now subscribing to Stockopedia, a company's StockReport™ can be considered a form of "outside view". Therefore, however well I think I know a company, I still regularly check it on Stockopedia both as a sanity check and to see how it is likely to be perceived by other investors. This article explores what is behind Staffline's StockReport, with a focus on quantitative rather than qualitative aspects, and considers how its StockReport is likely to evolve in future. It is aimed at readers with a moderate level of experience of Stockopedia.

At the time of writing I have no position in Staffline.

Analysis

Balance Sheet

Market capitalisation is shown as £32.9m and enterprise value as £131.3 with considerable net debt of £98.4m at the time of the H1 results. The Health Trend Piotroski F-Score is 2 (out of 9) and Bankruptcy Risk is indicating Distress with an Altman Z2-Score of 0.85.

Looking at the balance sheet as at 30th June 2019 I see cash of £5.0m with total borrowings of £94.2m and after technicalities they claim net debt of £89.9m. There is a deferred tax liability of £5.6m mostly due to acquired intangible assets and which will not become due unless / until these are sold. IFRS 16 lease liabilities of £9.2m are balanced with right of use assets of £8.7m. They have a deferred consideration for acquisitions due within 12 months at a cost of £2.3m. An unspecified, but likely majority proportion of the £20.2m provisions relate to minimum wage (NMW) violations and are shown as non-current, perhaps because they have previously stated the timing of these payments are uncertain due to negotiations over the size of the fine being ongoing with HMRC and difficulty in tracking down those due compensation.

Therefore I would approximate net debt at £106m (93.2 - 5.0 + 2.3 + 15) at 30th June. At that time liquidity looked relatively good with current assets well in excess of current liabilities, even treating the remaining NMW provision as current, but the real problem was…

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