Staffline Group “traded strongly in 2021, delivering multiple upgrades in both profitability and cashflows” says Zeus Capital

Staffline Group plc (LON:STAF) has released a positive FY21 trading update with underlying operating profit expected to double versus the prior year and net cash of £6.9m at the period end (vs. net debt of £8.8m in FY20). We see Staffline as a unique platform that has improving quality of earnings and a transformed balance sheet. The business has strong defensive qualities but with attractive growth opportunities in structural growth markets. We believe the shares are undervalued and see an intrinsic value per share of 99p based on the current profile of the business, which does not include future potential M&A that could enhance this valuation. We see good reasons to suggest strong trading momentum will continue through 2022 and beyond.

  • Unique platform: Staffline Group has a unique business model with both recruitment and outsourcing revenue streams. Through its Recruitment GB and Recruitment Ireland businesses, Staffline has strong market positions. Management intends to increase the permanent mix in this business over time to improve margins and cash generation across the Group. People Plus has evolved into a training and skills business with long term revenue streams delivering attractive organic growth of +13.7% in H1 2020. We believe the Restart contracts recently secured are testament to this, with training being critical to address the clear need to re-skill the labour force and clear shortages across the economy.
  • Forecasts: Our forecasts for FY21 are in line with the provisional figures in today’s trading update. In FY22, we expect 5.0% revenue growth and 14.0% growth in underlying EBIT to £11.4m, which will be a 13.3% conversion from gross profit. Over time, we forecast top line growth and operating margin improvements as Staffline deepens customer relationships, wins more contracts, and achieves a greater mix of higher-margin permanent recruitment income. This growth will likely require some working capital investment, but we forecast a continuation of balance sheet strength and lending facility headroom.
  • Outlook: Staffline Group has traded strongly in 2021, delivering multiple upgrades in both profitability and cashflows despite macroeconomic headwinds. Management expect this positive momentum to continue into FY22, with a strong pipeline of new business and a post-Covid bounce back in some of Staffline’s key sectors (automotive, manufacturing, aerospace and travel). We think this underpins our forecasts for FY22.
  • Valuation: Taking the valuation techniques used in this note (DCF, risk-adjusted blue-sky earnings, SOTP), we arrive at an average value 99p per share, a 78% upside from current levels. We have not taken account of any potential M&A activity and/or capital allocation events (e.g. share buybacks) that could take place following the working capital investment we expect in FY22. This has the potential to generate further long-term shareholder returns in addition to the Group’s organic growth plans.
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