Buy Staffline Group (STAF) at 131.5p

Argues Tom Winnifrith of t1ps.com

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Staffline Group (STAF) was originally tipped on t1ps.com by Tom Winnifrith back in March at 77.5p. If you'd bought the shares then, you could be standing on gains of almost 70% in just 6 months. But with the earnings multiple and dividend yield still looking attractive at the current price, Tom continues to rate these shares a "buy".

Within the next week on t1ps.com, Tom will be revealing 2 brand new tips on stocks he believes offer great value right now. To find out what they are, and listen to a webcast later this month with legendary investor Mark Slater, join t1ps.com now.

The Business

Staffline Group is a recruitment and training company which describes its main business as “a specialist supplier of ‘blue collar’ temporary and contract staff”. The largest area of activity is its OnSite offering, which represents 86% of group sales, and sees the company contracted by clients to recruit, train and manage temporary workers on the customer’s own premises. Having opened an extra six of these locations during July and August, the total now stands at 135.

In addition, the group has three smaller businesses: Techsearch specialising in temporary and permanent engineering, IT, HR and consumer goods placements; OSP, which provides permanent recruitment outsourcing services in healthcare, retail and distribution; and Peter Rowley, which provides ‘lean business’ training.

Strategy

Organic growth has been driven by existing clients taking on additional OnSites as well as new client wins and these have been supplemented by acquisitions. During 2009 the company reported that it was approached by in excess of 30 companies and advisors to see if it might be interested in buying. Three purchases - Peter Rowley, La Gente, a Cheshire-based recruitment business, and The Workplace, a Yorkshire-based recruitment company, were concluded and the company has emphasised, “we continue to look for acquisition opportunities”.

Financials

The company's recently-published interim results showed a 52.7% increase in pre-tax profit, to GBP2.08 million, on the back of a near 70% increase in revenue (to GBP83.36 million) for the six months ended 30th June 2010. Basic earnings per share came in at 7p, up from 4.5p, as the company benefitted from “strong demand from existing customers, new business wins in 2009 and 2010 and also the impact of the acquisitions made in 2009”.

The company generated GBP1.66 million from operating activities, funding GBP1.27 million of acquisition spending and still seeing net debt down to GBP4.76 million at period end, from GBP4.96 million six months earlier. At 30th June net current assets totalled GBP2.42 million and net tangible assets GBP0.522 million.

It is expected that the cost pressures being experienced by Staffline’s clients and target customer base will endure and that they will thus continue to be attracted to the combination of outsourcing the temporary recruitment function - allowing them to focus on managing their core business - and the operating efficiencies which Staffline can deliver. The company added “trading in the first few weeks of the second half of 2010 has continued to be extremely strong” and that it “now expects earnings for the full financial year to be significantly ahead of current expectations, further to the trading update released on 18 June 2010”.

Forecasts, Valuation and Conclusion

On being t1pped at 77.5p in March, expectations were for 2010 earnings per share of 13.3p, rising to 14.4p in 2011. They are now for current year earnings of in excess of 21p per share, rising to more than 22.5p next year. Additionally, dividend expectations were 3.6p, rising to 3.9p per share. With today’s results, a 2.4p interim dividend is being recommended (a more than 71% uplift on last year’s 1.4p interim dividend payout) - to be paid on 12th November to shareholders on the register as at 15th October. The whole year expectation is now for 5.5p per share, rising to around 6p in 2011.

Even with the shares at 131.5p, the earnings multiple is still just 6.3, falling to 5.8, and the dividend yield an attractive 4.2%, rising to 4.6%. Together with the company’s defensive growth momentum, good cash generation, solid balance sheet and it increasingly looking to bolt on acquisition opportunities as they arise (two acquisitions were concluded in May), Staffline continues to look a highly attractive investment. As such, I lift the limit buy price to 150p (now just 6.66x next year’s forecast earnings) and reiterate the stance of “buy”.

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