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Stock to watch: Empresaria Group

Stock to watch: Empresaria Group

From a macro perspective of judging the global economy, to micro cap stock-picking, it is interesting to note how Crawley-based international specialist staffing group Empresaria Group (EMR) has made another announcement saying it is ahead of expectations.

A previous update I noted was at last June's AGM and now management says its trading has benefited from exposure to developing countries, "with solid organic growth being generated particularly in Germany, the group's largest market, and in Asia".

This affirms a general sense that emerging markets have been doing well and is a pointer that without any further significant shocks to the global economy the recovery trend ought to continue. A smaller recruiter like this is a particularly sensitive indicator of business conditions. Depending on the industry, the upshot could be positive for other cyclical shares where investors are wondering about further upside.

I drew attention to the AIM-listed shares at 45p last June, noting an attractive risk/reward profile after the AGM update and with various directors having bought shares - in particular, a new finance director. This was the first sign of Empresaria being ahead of expectations and the situation shows how it pays to be alert for such companies, in case of a trend.

Obviously, the global economy is not without risks, but it is notable how a board of directors has already gone on the record anticipating full-year 2011 results ahead of market expectations.

The shares entertained 60p last autumn then drifted near 50p towards the end of the year.

Sometimes the tighter market in small caps just has vagaries, as Empresaria has since recovered poise and touched 65p after this update. At this level, the forward price-earnings multiple is most likely still about eight times: the last consensus earnings per share forecast for 2011 (as published in Company REFS) was 7.26p last autumn and the update implies at least 8p is now in the frame.

This share's history has seen its P/E multiple vary from 20 times in 2007, as low as three during 2009, showing how wildly sentiment towards small cap cyclicals can swing. When the economy is booming the market is prone to rate cyclicals more akin to growth shares then when a downturn sets in there is a sharp reversal in the rating.

Empresaria's P/E multiple ought to steadily improve now the earnings outlook is firming, such that 80p may be a reasonable medium-term target.

This is really a capital growth play (and trying to avoid loss, with decent timing), although there is a dividend probably to satisfy institutions, the yield is sub 1%.

Last June I noted now net debt was projected to fall to about 6 million by end-2010 and 4 million by end-2011 the update already cites 5.5 million at end-2010 as a result of strong cash generation, despite investing 2 million to buy out minority shareholdings and boosting working capital to support increased revenue.

While full-year revenue rose by 17% to 223 million, net fee income (which tends to be the real yardstick for a recruiter) rose 20% to 49 million. After a particularly strong first half 2010, second half net fee income rose 14% (like-for-like) to 25 million.

Despite some adverse effect from December's weather in the UK and continental Europe, this was compensated for by stronger performance elsewhere. A few years ago I recall Empresaria's Asian business being largely in start-up phase now maturing they have made a "material profit contribution".

Strong performance in Germany and Austria (90% of continental European net fee income) relates to a burgeoning temporary staffing market amid a strong German economy and in the UK, new initiatives in non-public sector temporary staffing have boosted revenue.

Empresaria has also enjoyed the benefit of professional/financial services employment markets recovering. Key points operationally from this update are its showing Empresaria diversified in international staffing markets that should offer structural long-term growth and where there are challenges it is adjusting adeptly.
With new offices in China and Australia, a "hub" approach is being applied through four group companies to develop Far Eastern regional offices at reduced cost and risk. The kind of risk you might worry about concerning a small British PLC operating from 17 countries, is logistically taking on too much, although Empresaria is proving its mettle.

As tax rises nudge the UK back to a risk of recession, this is a small cap with a difference: about two thirds of its net fee income from outside the UK. You can find other small caps with overseas exposure but they are typically UK-oriented. So the trend in events increases Empresaria's appeal to smaller company funds.

The main drawback, however, is tight liquidity in this near 30 million share: Caledonia Investments owns 23.1%, the chairman Tony Martin 20.8%, chief executive Miles Hunt nearly 9% and four other committed institutions over 21%.
While the strong management ownership aligns their interests with outsiders, it adds to the shares' inherent volatility as a small cap recruiter for example the 2007-09 plunge from 179p to a low of 23p. More positively, if the company is now on an improving trend the tight market will help to steadily squeeze the shares' rating higher.

As regards the balance sheet, at end-June there was 25.6 million goodwill in context of 27.1 million net assets such is the nature of a "people business" which may deter some investors, being mainly intangible assets, however market value will essentially be driven by earnings.


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