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Staffline announces trading update

Staffline announced an update on trading this morning ahead of the AGM later today. The announcement is short on detail, except to state that the company has traded well since the publication of the preliminary results in February, experiencing strong demand from both new and existing customers. We think the latter reflects good progress made in the number of OnSites opening within clients’ facilities. Management has also highlighted the investment in Driving, Agriculture, Ireland, Select Appointments and OnSites into white collar roles, which by and large have been received well by clients. The one exception to this is Select Appointments (the franchised white collar high street recruiter), in our opinion, which has started life in the group very slowly, albeit we understand that the expansion in the number of franchisees is in the pipeline.  

Acquisition and placing

The group has announced the acquisition of Avanta Enterprise Limited (Avanta) for a consideration of &pound65.45m, with associated costs of &pound1m. Avanta is a primary contractor and sub-contractor to Welfare to Work programmes in four regions, the North West, North East, East Midlands and the South East, including three primary contracts. In addition, Avanta group runs employment and vocational skills courses, including a job placement contract with the Kingdom of Saudi Arabia. The business employs approximately 600 staff across 43 sites, comprising a mix of larger centres located in major urban areas, with smaller centres within local communities. All sites are well invested and equipped for on-site training.

The combined Training division will be the third largest Welfare to Work programme provider (four contracts and five sub-contracts), with all contracts in the upper quartile of performance, a major provider of European Social Fund contracts in Yorkshire and the West Midlands, training contracts with the Skills Funding Agency and FE colleges.

Staffline continues its trend of paying reasonable multiples

The gross consideration including costs amounts to &pound66.45m. &pound18m of cash within Avanta was paid to the founders ahead of completion, with &pound2.45m of debt repaid, leaving a net consideration of &pound46m, including costs. The initial consideration of &pound25.35m was paid on completion and funded by a combination of a placing of 2m shares to shareholders at 800p per share (representing a premium to the closing share price of 772p) and &pound10m of term debt. A number of the Executive Board members at Staffline participated in the placing, increasing their holding by 55,125 shares at a cost of &pound0.441m. The shares include an entitlement to receive the final dividend from the year to December 2013, payable in July 2014.

The deferred consideration, which does not appear to be contingent on the future performance of the Avanta business, will be satisfied through a &pound20m loan note (repayable in two tranches, of &pound11m in 12 months and &pound9m in 19 months). Historic revenues and EBITDA to March 2014 of Avanta amounted to &pound70m and &pound12.1m, respectively, representing a multiple of EBITDA of 5.4x on the gross consideration, pre-costs. The term loan will be repaid in 16 equal quarterly instalments of &pound0.625m.  

Strong training pipeline

The management of the combined Welfare to Work business is to be managed by Avanta’s current managing director, Peter Brooks. The group’s tender pipeline remains strong currently in national and local government outsourcing contracts for the wider training business, amounting to potential annual values of c&pound85m in total. The announcements of all contracts are expected to be made ahead of the current year end. In addition, we expect the combined entity to have a greater capability of securing additional Welfare to Work contracts when the new five-year term commences in two years' time. 

Estimate upgrades

In terms of estimates, we have sought to be conservative in view of our top-of-the-range estimates ahead of the acquisition. With revenues and EBITDA likely to remain broadly stable for the remainder of the Welfare to Work programme, we anticipate that adjusted PBT / adjusted EPS are likely to increase following the deal to &pound19.4m / 57.7p in FY2014F and &pound24.5m / 72.7p in FY2015F, representing upgrades of 15.3% and 22.9% respectively.

In addition, we estimate that by FY2015F the split of profits between Recruitment and Training will be more even, as a result of the deal, although the revenue breakdown is likely to still strongly favour Recruitment division. Following this morning’s announcement, management has understandably increased its FY2017F estimate of adjusted PBT by &pound10m to &pound40m.

Recommendation upgraded

In terms of recommendation, we are upgrading from Hold to Buy, reflecting the earnings-accretive nature of the deal, and while much of the uplift from the acquisition has already been delivered this morning in the sharp increase in the share price, we believe that on a 12-month basis the shares should progress from here. The new ratings based on our updated estimates comprise an FY2014F EV/EBITDA of 11.1x and PER of 15.6x, falling to 8.4x and 12.4x respectively in FY2015F. While this broadly looks up with events, the group is trading on a FY2015F PEG of 0.5x, based on a two-year CAGR in earnings. Buy.   

Analyst: David O’Brien – 0151 600 3707



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