Staffline Group PLC

EPIC:        STAF
Share Price: 209p
Market Cap:  £47.8m
P/E (hist):  6.1
Yield (fwd): 3.9% [8.1p]
Year end:    31-Dec

Staffline was originally introduced to the Pub by DukeOfYork in 2009. I bought in following a Mello presentation in November 2010 and the second thread gives an overview of that presentation. There has been a flurry of discussion in the last couple of days as they have just released their results to 31-Dec-2011.

[DukeOfYork 2009] http://boards.fool.co.uk/staffline-staf-11708057.aspx?sort=w...
[Mello presentation 2010] http://boards.fool.co.uk/mello-presentation-by-staffline-121...
[Prelims 2011] http://boards.fool.co.uk/staffline-staf-12493487.aspx?sort=w...

Operations
Staffline provide blue collar workers to industry. Industry likes temporary workers because they can ramp up and down their production according to demand. Staffline has an interesting business model which is to open onsite offices actually inside the factory locations of key customers - as such they must be regarded as partners by these key customers. I guess the customer can just walk into their office and have a chat about the number of staff that will be required tomorrow. This part of the model represents 85% of their sales and they are located at 163 customer sites. The smaller part to their business model is to open traditional offices in secondary high street locations and work with customers from there.

Staffline is pretty agressive about expansion and tries to aquire businesses with payment of 1x earnings upfront and then 2x as earnout if contracts are retained. In 2011 Staffline acquired 5 businesses, bringing total OnSites to 163 and with 18 branches.

                 2006    2007    2008    2009    2010    2011
OnSites          71      101     112     119     135     163        
Branches         16      20      15      15      15      18
Acquisitions     0       1       0       3       3       5

One of their acquisitions this year was EOS, a Welfare to Work service provider. This moves Staffline into a new business area finding work for the long term unemployed. The market does not really understand this business and there are concerns that companies running these contracts will have cashflow problems as they do not get paid for their placements until the employees have been in their new roles for some time. However, I hope that Staffline can leverage its position in the market to easily find work through its existing contracts for these staff and also gain payments for their success if the position ends up working in the long term. Since the aquisition EOS has won three contracts, one worth £93m over 5 years and the other two worth £53m over 3 years between them. These could end up very lucrative for Staffline although we probably will not see large profits coming through in the current year (2012).

Financials
Here is a brief synopsys of the financials for the last 6 years. Revenue has increased significantly from £84m in 2006 to £288m now, and PBT and EPS have increased pretty much inline. Although Staffline have been very aquisitive this has all been funded out of cashflow; they had 20.7m shares in 2006 and have 22.6m now, the difference being staff share options.

                 2006    2007    2008    2009    2010    2011
Revenue £m       84      120     121     115     206     288
PBT £m           3.3     4.4     3.4     3.5     7.0     7.5
EPS              11.3p   14.2p   11.1p   11.5p   23.7p   25.9p
Dividend          1.7p    2.5p    2.9p    3.1p    6.1p    7.1p

Moving on now to Cashflow, you can see that all of Staffline's incoming cash has been spent on dividends or acquisions. Capex is pretty minor; all they need I guess is an office with a desk and computer. Actually, I'm oversimplifying. The process of paying a million paycheques a year which vary each week on time and without making mistakes is hugely complex and Staffline have been improving their back-end systems which should double the number of staff they can pay each week and should improve operational efficiency.

                 2006    2007    2008    2009    2010    2011
Cash from Ops     0.5     3.6     1.5     2.7     9.4     7.5*
Capex            -0.2    -0.1    -0.2     0      -0.4    -1.1
Acquisitions      0      -2.1     0      -1.0    -4.3    -8.7*
Dividends Paid   -0.5    -0.6    -0.8    -0.6    -0.9    -1.4

*Note: Published cashflow statement in 2011 understated cash from ops by £7.1m and understated cash spent on acqusitions by the same amount due to some odd aquisition accounting. I have adjusted these two figures by this amount to make the underlying business performance clearer.

Finally, the balance sheet shows that although book value has been increasing nicely by a few million a year, the increase is largely due to the intangibles that Staffline is buying when it purchases another business. The businesses it buys are just a desk and computer as well; it's the contracts contacts and relationships that are valuable, and this is why Staffline pays earnouts on the aquisitions only if the contracts remain. NTAV has increased very slowly over the years but this is largely down to the the increased working capital that Staffline requires to fund its higher turnover. Net Debt is £5m which represents gearing of 15% and the FD seems confident that the banks are OK to continue their facilities (which are renewable annually).

                 2006    2007    2008    2009    2010    2011
NAV              20.0    22.6    24.3    26.1    30.6    35.0
NTAV             -2.4    -1.7    0.1     0.0      3.0     1.1
Working Cap       4.0     4.4    5.7     6.6      7.3     8.3

Directors Pay
Executive Directors are paid between £115 and £178k basic salary and in the last 2 years have earned a discretionary bonus of around 50% on top of this. The total directors salary spend in 2009 was £839k and in 2010 was £928k, so up 10% in 2010.

The board of directors seems pretty strong. Andy Hogarth the CEO sits on a number of government recruitment committees as does Marshall Evans the Operations Director. A new NED has been recruited in 2011 and Diane Martin has joined. She has been MD of Blue Arrow and CEO of Select Appointments so should bring some good experience to the board.

Share Ownership
Directors (Andy Howarth and Marshall Evans) own 14% of shares. There are 13 institutions with holdings from 2 to over 10% and these include Ennismore (3.4%), Cazenove (5.1%), Investec (5.1%), L&G (4%), ISIS (8.5%). Andy Howarth and Marshall Evans did sell some shares last year which apparently was due to institutional demand.

Forecasts (pre this weeks results)

£m            2011E (pre-results)     2012E                  2013E
Revenue        245                    284.9                  359.6
PTP (adj)      9.6                      9.9                   12.1  
eps (adj)     29.5                     30.4                   37.0
Div            7.4                      8.1                    8.8

The table is borrowed (and reformatted) from DoY's post (thanks!) and represents forecasts prior to Staffline's results earlier in the week. The revenue forecast was beaten by 18%, PTP by 7% in this weeks 2011 results. So I'd expect the 2012 and 2013 forecasts to be bumped up a bit once analysts have chewed the cud with management.

Summary
This is a bit of an oddity; a growth company which has been growing organically and through fairly agressive acquisition without recourse to large amounts of debt or share issuance, which pays a decent dividend of 3.9%, and which is rated on a value P/E.

Max