Gattaca is the UK's number 1 specialist engineering (60% group NFI) and number 5 technology recruitment agency, providing contract, temporary and permanent staff. It derives 32% of NFI overseas (albeit mostly still invoiced from UK), and 74% from placing contractors (circa 9,000 on assignment), with 26% coming from permanents. The global engineering and technology recruitment markets are valued at circa $26bn and $57bn respectively, offering substantial long term potential.
Although there are some promising pockets of demand (eg City recruitment) returning to the UK jobs market post BREXIT, this has not yet fed through into Gattaca’s more specialised Engineering and Technology verticals - with continued “uncertainty” resulting in “elongated hiring decisions and projects being delayed”. Here we suspect some of the headwinds have been caused by temporary scheduling difficulties at Network Rail and Highways England, along with recent softness in Telecoms (re Ericsson and Huawei exposure).
Indeed we understand Q3 LFL NFI growth (constant currency) is presently tracking at similar levels to Q2’s -2% decline, albeit encouragingly “the medium-term outlook remains positive with some signs of confidence in recent weeks”. Whilst today's update is disappointing, we remain confident there is still significant value for long term investors, given that the company should be a direct beneficiary of future increased infrastructure (eg CrossRail 2, HS2, Hinkley Point and the 3rd runway at Heathrow) and technology spend worldwide.
The news has led to a decrease in our adjusted PBT estimates for this year and next by -£2.9m (-15%) and -£1.7m (-8%) to £16.7m and £20.2m respectively. Net debt is anticipated to close July 2017 at £32.4m, equivalent to 1.7x EBITDA.
With the full year benefits of February’s £6.9m RSL acquisition expected in FY18, our valuation falls 8% to 425p/share from 475p previously. In our view, the stock at 270p offers considerable upside to fair value, trading on trough EV/EBIT and PE multiples of 6.7x and 7.7x respectively, whilst also paying a 9% dividend yield (1.5x covered).
