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Sanlan Securities Recommends Buy Status for Staffline

Staffline’s &pound45m acquisition of Avanta is strategically important providing the group critical scale in the provision of Welfare-to-Work contracts. As a consequence, the enlarged operation is well placed to secure future government contracts when they are awarded after the next general election. Investors have responded positively to the news, with the shares up &gt20% since the day before the deal was announced.

Creating the third largest Welfare-to-Work supplier: Staffline now has four prime supplier contracts within the welfare-to-work programme, creating the third largest portfolio in the sector. The government has been reducing the number of suppliers (favouring larger suppliers), a trend we expect to continue. Staffline is paying an EBIT multiple of 5x. The multiple paid, implies Staffline has appropriately risked the contract renewals at approximately 25%-30%, providing shareholders considerable potential upside on re-signing.

Recruitment division continuing to perform: Over the last decade Staffline has delivered top-quartile EPS growth (19% CAGR FY04-FY13). This has been driven by the expansion of the OnSite, with locations increasing from 53 (FY05) to 194 (FY13). Recent results show new business wins are continuing and we see no reason this trend will not be maintained.

Valuation: Over the last two years the 12 month prospective PER has increased from 6x to &gt14x, reaching pre-recession levels and the re-rating is likely to slow. However, we believe the shares are still likely to move higher, driven by the on-going earnings growth.

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