Gattaca is the UK's #1 specialist engineering (60% group NFI) and #5 technology recruitment agency, providing contract, temporary and permanent staff.
Despite Friday’s weaker-than-expected trading update, where our FY17 adjusted PBT and EPS estimates were trimmed 15% to £16.7m (£7.4m H1) and 35.0p (16.1p) respectively, the Board this morning reiterated its view that business/candidate confidence is tentatively recovering after June’s shock BREXIT vote – backed up by sequential improvements in LFL NFI (constant currency) with Q3 currently tracking at -2% (vs -3% Q2 and -5% Q1) and Q4 predicted to be slightly up again.
Structurally, we believe Gattaca is ideally placed to benefit from rising global spend on infrastructure (Heathrow, Hinkley Point, Crossrail 2, HS2, rail electrification, smart cities), engineering and technology (eg Cyber security, IoT, Cloud, 5G, autonomous vehicles), augmented by X-selling synergies, expansion abroad and the ongoing adoption of IT/Telecoms within its other key verticals of Automotive, Aerospace, Defence, Energy and Maritime.
In fact the wider UK jobs market also appears getting its mojo back, as evidenced by Robert Walters, Michael Page and Hays, all posting better numbers last week. Admittedly, there might be a minor dip in hiring over the next 2 months as a consequence of the forthcoming General Election. Yet, further out this could actually galvanise the country, especially if the Conservatives (as Pollsters envisage) win a thumping majority - which is probably why the Pound jumped almost 2% (vs $) after Tuesday’s announcement.
Nothing is 100% cast-iron, but for Gattaca we believe there is minimal risk of a dividend cut, based on the solid economic backdrop, 1.5x EPS cover, comfortable 1.7x net debt/EBITDA levels, significant un-utilised banking facilities (£75m invoice discounting & £30m RCF) and recent completion of the Networkers restructuring. Moreover, excluding one-offs, the business as a whole is set to generate between £10m-£11m of underlying cashflow (post capex, tax & interest) this year. Encouragingly, the Board have today maintained the 6p interim pay-out.
In terms of the H1 results, underlying EBIT fell 21% to £8.0m, due to the decline in NFI (-4% LFL constant currency to £35.4m), impact on operational gearing and “mixed” conditions across most Engineering (-4% to £21.1m) disciplines (excluding Technology/Aerospace), where delays were experienced at Network Rail and Highways England.
Putting all this together from an investment perspective, we think the stock at 280p represents good value, trading on FY17 EV/EBITA and PER multiples of 6.9x and 8.0x, whilst offering a sector-leading 8.2% dividend yield.
NB Gattaca management will present to investors via webinar TOMORROW, Friday 21st at 1.15pm Register here
