Solid H1 results, synergistic acquisition, on track to hit FY17 consensus

Gattaca is the UK's #1 specialist engineering (60% group NFI) and #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. 

Today, in a pre-close trading update it reported robust 1st half figures that are in line with FY17 expectations, together with sealing a chunky earnings enhancing acquisition. Indeed, as a consequence of the deal we have nudged up our adjusted PBTA targets for this year and next, by £0.8m (or 4.2% to £19.6m) and £1.9m (9.6% to £21.9m) respectively

In terms of specifics, H1 NFI declined modestly by -2% to £35.1m (£35.9m LY), with the UK falling -4%, partly offset by International (+2%) thanks to sterling weakness. Encouragingly too, the figures improved sequentially (-3% Q1 vs -1% Q2), and were generally better in the UK than achieved by several of its rivals.

In constant currencies (ie excluding forex benefits) overall NFI dropped -5%, reflecting softness across most Engineering (-4% to £21.1m) disciplines (excluding Technology and Aerospace), where hiring decisions were said to be “elongated” but pleasingly vacancy flow remains “strong”. Elsewhere, Technology NFI fell -6% to £14.0m, with IT (+1%) continuing to benefit from refocusing on more tightly defined verticals (eg Cloud, Cyber-security), albeit negated by a -14% decrease in Telecoms, where volumes were hit by less demand on some international projects.

Separately, on the M&A front the Board announced this morning that it had acquired (post period end) 70% of UK based Rail, Power and Built Environment recruitment specialist, Resourcing Solutions Limited (RSL) for £6.9m in cash. The purchase is said to be “immediately earnings enhancing and will contribute positively to operating margins and cash generation”. Here we reckon £500k pa of cost synergies have already been identified – much of which should flow through to EBITA in FY18 – with RSL anticipated to deliver underlying EBITA of £2.0m on NFI of £7.5m (£7.2m) for the year ending 31 January 2017, of which around 88% is derived from contractors.

When added to the base business the stock at 300p trades on a meagre forward PER of 7.3x, which to us looks undemanding, particularly in light of its corresponding CY unlevered cashflow and dividend yields of 11.1 % and 7.8% (1.75x covered). We increase our group valuation to 475p/share (+6.2% vs 450p before).