The company has provided an update on trading for the period ending July 2020 (prelims 3rd November):
- Client demand was originally impacted by the General Election and Brexit, then later by IR35 and the coronavirus. The latter also infecting APAC (China now closed) from January, followed by EMEA and the Americas in H2.
- As a consequence, total NFI dropped -41% for the 3 months ending June (vs -11.9% H1’20, & Hays UK -42%): split -36% contract vs -52% permanent.
- Pushing FY20 NFI down -25.5% to £54m (vs £70.6m LY, or -22% LFL £69.2m), which we estimate generated an adjusted EBIT of approx. £5.5m (conversion rate 10.2%). Higher than “the Board’s initial expectations”, aided by several new business wins & rigorous cost control.
- Sure, July revenue run-rates haven’t yet witnessed a material rebound, however there are promising early “signs of increased activity” (eg interviews) - with some previously furloughed staff now being re-deployed. Gross margins have been little affected.
Better still, cash generation was outstanding, with net debt decreasing from £24.9m in Jul’19 (-£19.1m Jan’20) to £1m of net cash as at 30th June (incl £22m non-recourse finance). Driven by an unwind in contractor related debtors, disciplined working capital management, tax deferrals (£10m VAT) & cost cutting, partially offset by restructuring (eg China) and IT capex. Also, covenant tests for the HSBC £10m RCF have been revised through to July 2021.
Our assumption is that NFI should return to at least 80% of pre-Covid levels by FY22, reaching full speed 18 months later. Using a 7x EV/EBIT multiple on FY23 profits, and discounting back at 12% we arrive at a fair value of 130p/share, equivalent to >185% upside vs 43p currently. Reassuringly, over the longer term the fundamentals of STEM play to GATC’s strengths.
