Gattaca (c.810 staff) is the UK's #1 specialist engineering (60% NFI) and #6 technology (21%) recruitment agency, providing contract, temporary and permanent staff (Source: Recruitment International). It derives 30% of NFI from overseas (including international placements supplied from the UK), and circa 72% from temps, with the remaining 28% coming from permanents.
The Company is the first to admit that in April 2015 it bit off more than it could chew with the £66.8m transformational acquisition of Networkers International (NI). Attempting in one fell swoop to expand outside of its UK engineering heartland, only to discover a catalogue of deep-rooted issues. But in this morning's FY18 prelims, the good news is that the self-help measures are starting to bear fruit. Sure there's still plenty to do, and most of the benefits (eg £3m of annualised savings) will be only fully realised in future periods.
Overheads have been cut, headcount reduced (870 Jan vs 810 in July), underlying cashflow improved (y/e debtor days 52 vs 55 LY) and LFL NFI growth stabilised at +1%. Moreover, apart from a temporary air-pocket in demand at Network Rail which hurt RSL (HS2, CP5, Crossrail winding down & Carillion), we understand UK Engineering's FY18 NFI would have actually been up +3.5% rather than the 1.4% reported.
Elsewhere, there was a shift in FY18 NFI between contractor (-5% LFL) vs permanent placements (+19%) - coming in at 72:28 vs 76:24 FY17, and mirroring the new public sector IR35 rules, buoyant conditions in the US and IT exclusivity agreements. For FY19, this mix should move further towards perms thanks to the withdrawal from Telecoms Infrastructure, partly offset by an increase in the North American contractor base. Encouragingly too, despite the recent slump in UK car production (JLR, Michelin, Schaeffler, diesel, etc), Q1 trading is consistent with our FY19 expectations at the NFI, PBT and EPS levels.
The Group's medium-term priority is to reduce net debt to below 2x EBITDA, compared to 2.7x in July and an estimated 2.9x in FY19. This will not just provide the Board will extra flexibility, but also eventually enable dividends (temporarily suspended) to resume. The pay-out policy being to distribute c.50% of statutory EPS over the economic cycle. The Board has adjusted. promptly in Mar 18 and renegotiated its banking arrangements with HSBC.
So, in light of the improving outlook, our FY19 NFI, PBT and adjusted EPS (diluted) forecasts have been broadly held at £72.0m (vs £72.1m before), £10.9m (£10.9m) and 23.1p (24.5p) respectively. Similarly, the 180p/share valuation has been retained - with the stock at 140p trading on modest FY19 EV/EBIT and PER multiples of 6.6x and 6.1x respectively vs 8.6x and 10.3x for the sector.
