Gattaca, employing 870 staff, is the UK's #1 specialist engineering and #5 technology recruitment agency, providing contract, temporary and permanent staff.
After today's interim results and 3rd profit warning within a year - this time reducing FY18 PBT expectations by approx. 15% (ED -12% at £13.0m vs £14.8m) - management are the first to admit that mistakes have been made. Nonetheless the Board, being their own harshest critics, know what needs to be done and are fully committed to rectify the situation. To us, despite the disappointing share price, Gattaca still appears a fundamentally sound business with attractive growth prospects.
Indeed in its UK heartland (82% H1’18 NFI), the firm continues to out-perform rivals (H1’18 NFI 1.2% LFL vs 0.1%) amid a 'challenging' backdrop . Across the pond, the Americas is posting 'excellent' LFL NFI growth (+30% to £3.7m) on the back of a tight labour market, Texas' 'high-tech IT' boom and the launch of the Matchtech brand in Energy (US Shale) and Engineering. That said, this international success has been tempered by difficulties in Asia (-14%), continental Europe and South Africa (-25%), which has led to closures of the Singapore & Munich sales offices that lacked 'critical mass'.
UK Engineering (+3% to £24.2m) was boosted by strength in Converged Technologies (+24%), Automotive (+15% - electric/autonomous vehicles, telematics, etc), Smart factories (Production 4.0), Alderwood (+35%: apprentice training) and connected cities/infrastructure. But UK IT (+3%) continued to benefit from Cloud implementations, albeit UK Telecoms (-19%) suffered from pricing pressures and lower OEM demand (eg Huawei and Ericsson), reflecting delayed roll-outs of 5G/4G wireless networks, and necessitating a leadership change post period end. Going forward, we reckon management will be far less tolerant of persistently under-performing units.
Not surprisingly something has had to give, and the proposed interim dividend of 3p (vs 6p LY) has taken some of the strain. Similarly going forward, the pay-out policy has been revised with the aim of distributing 50% of 'through-cycle' statutory earnings, assuming net debt declines of £3m+ pa from FY19 onwards. Or in other words, rebasing the FY18 payment to 9p (vs 23p), representing a CY yield of 4.9%.
With regards to Q3 trading, February & March have 'broadly' been 'in line with expectations', albeit macro conditions have not yet caught up with previously optimistic Q4 18 assumptions - hence the Board decided this morning to realign FY18 PBT guidance.
Likewise, we have erred on the side of caution with new forecasts and reduced our valuation from 295p to 240p/share. The stock at 185p is on a low rating, trading on FY18 EV/EBIT and PER multiples of 7.1x and 6.8x respectively, whilst paying a hefty 4.9% dividend yield.
