Stock Pitch - Gattaca (LON:GATC)

24th Feb '21 by Jack Brumby

11 comments 5990 reads

Gattaca (LON:GATC) was pitched to the Stockopedia Investment Club on 2nd of February 2021.

Markets are buoyant right now and vaccine rollouts mean investors, while mindful of ongoing Covid-19 risks, are also looking towards the potential 'reopening' of the economy.

Andy Haldane (the Bank of England's Chief Economist) says the UK economy is poised like a 'coiled-spring' due to pent-up demand, high consumer savings, and the restarting of delayed projects.

There's a chance we're in for a rehiring boom once conditions normalise, and Gattaca, with its STEM focus, is well placed to capitalise on this recovery scenario. What's more, modest cash flow multiples and an enterprise value of just £13m appear to offer a margin of safety here.

But are we jumping the gun with a 'recovery' pitch? And is Gattaca the way to play it?

Summary

Bull points: Cash rich and low enterprise value in a depressed, cyclical sector; specialises in 'in-demand' areas of talent (technology and engineering); operational progress has been masked by the pandemic; well placed to participate in an economic recovery; 25% owned by founder

Bear points: Uncertainty over potential DOJ fine; The risk of a prolonged economic recession; volatile operating results

Profile

Gattaca is a recruiter in the Industrials sector listed under the Professional & Commercial Services industry group. It has a market cap of £33m and an enterprise value of just £13.3m. After a steep drop from 85p to 29p in the early throes of the Covid pandemic, shares have now rebounded to a 52-week high of 104.25p.

The company specialises in Science, Technology, Engineering and Maths (STEM) recruitment. Matchtech’s share of the engineering recruitment market is estimated at around 5%. Gattaca aims to replicate this internationally, across all the sectors it currently operate in.

Its services include:

Traditional staffing,
Packaged campaigns (a higher-touch, more value-added recruitment campaign service),
Market insight reporting,
Workforce solutions,
Engineering and technology projects, and
Talent attraction and employer branding.

The small enterprise value means Gattaca can be viewed as a deep value investment, with an EV of £13.3m but FY20 net fee income of some £54.3m. The spread is 588bps and the EMS is 8,000, so trading costs and liquidity are factors.

Gattaca has strong Ranks across the board and a 99 StockRank, meaning it qualifies as a Micro Cap Super Stock.

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Bluesky Ventura

24th Feb '21

Hi Jack,

Another great stock pitch. I really find it useful and enjoy the detail included in this format. It's made evaluate or evaluate a number of the pitches. Please keep them coming.

BSV

mcav82

Good evening, Jack,

Is there really no information available regarding the potential downside concerning the issue with the DOJ? Is there a high probability that they will lose the case? And if so, how high could potential fines be?

If anybody has an insights, I‘ll love to hear them. From what you have written, Gattaca sounds a very interesting, contrarian play.

Sovereign Individual

Thanks for the great write up Jack.

I would add to the bull case they have stripped £4M in annualised costs out, which should help improve margins in the near term.

But is it not the case that they owe £10.3M in deferred VAT which would mean net cash of around £10M and an adjusted EV of £23M?

I hold.

aflash

In a previous life, on another continent, long before Stockopedia, I audited companies supplying temporary contractors, one of which was networkers and its murky offshoots.

To remain competitive, avoid legislative controls and levies, these companies form multiple legal entities, ready to declare bankruptcy when threatened. A colleague was working on another but neither of us was able to get hold of satisfactory accounting records.

An internet search of DOJ v Networkers will give some background to yet another investigation.

On one hand are entrepreneurs who need temporary help without commitment and on the other government and para-govermental agencies who have to apply legislation that protects citizens. That ranges from minimum wage to health and safety in the workplace to all sorts of taxes. One of the ironies is that governments themselves use temporary workers a lot. Very small companies needing workers can never make profits if all the powers laws provide are respected to the letter. On one hand is the hangover from days when trade unions were strong and on the other modern workplace demands of 'just in time'.

So companies operating in sectors where there is high turnover, maybe seasonal, maybe contract related need to be very nimble.

Likely to be a bumpy investment.

Jack Brumby

25th Feb '21

Thanks BSV,

Enjoyed the Sylvania Platinum (LON:SLP) write up you did. We actually discussed that one at Mello this week, Stephen English had some interesting counter arguments.

I like the Stock Pitch format too, keeps everything consistent.

Hi mcav82,

There is a deal of uncertainty around events here. From the FY20 Annual Report:

We continue to cooperate with the US Department of Justice (‘DoJ’) and there have been no significant new matters in this regard during the year. Legal fees on this matter were £1.4m in the year (2019: £3.4m), the vast majority of which were incurred in the first half of the year.

And from note 28 to that report:

The Group is not currently in a position to know what the outcome of these enquiries may be and therefore we are unable to quantify the likely outcome for the Group.

Unfortunately, there really isn't much more detail than that in the accounts. It could be that these enquiries come to nothing but that is far from guaranteed and the resulting uncertainty is a key risk to bear in mind.

Od S

26th Feb '21

what is mello? New member

Paul Scott

28th Feb '21

Thanks Jack, really interesting article. I hadn't realised the founder still owns 24%, that's a big plus for me, as I'm putting much more emphasis on backing owner/managers, as it's worked very well for me with Best Of The Best (LON:BOTB) , Gear4music Holdings (LON:G4M) , and Boohoo (LON:BOO) .

The US legal action is a major worry though. Just the costs alone are so high, that it suggests this could be a serious problem.

Illiquidity - every time I give my broker a buy order, we only get filled in small scraps. So it's taken several attempts to build up a position size that's only less than 1% of my total portfolio, which does make me wonder if it's worth bothering with? Also, it means an exit would probably be messy, or even impossible, if something were to go wrong (e.g. adverse legal action result).

So it's maybe riskier than it looks, for these reasons.

Regards, Paul.

Robert W

1st Mar '21

Hi - have a look here: https://melloevents.com/.

Tripps

24th Mar '21

Interested in what the view is on Gattaca's price target... ? I note it is already trading above the brokers forecast ?

cic

26th Mar '21

I think it is worth mentioning that the largest shareholder after Materna is MMGG Acquisitions Limited, holding 16% of the shares. HRNet Group Limited hold 6%. Both of these entities are active in recruitment. I would not be surprised to see them seeking to increase stakes or takeover approach once the DOJ case is determined, and COVID effects are history.

Stock Pitch - Gattaca (LON:GATC)

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Jack Brumby

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