Recruitment is a cyclical business. When companies are confident, they take on more employees. When there's trouble, hiring is often the first thing to go. While 2015 has been reasonably good for listed recruiters such as Robert Walters and Michael Page, the performance of Aim-traded Penna Consulting (PNA) demonstrates why its business model is a more reliable source of earnings growth than its larger competitors. This, together with a 3.4 per cent dividend yield, a push into the niche but high-margin talent management sector, and Penna's status as a takeover target, should help maintain this year's share price momentum.
- Counter-cyclical business model
- Dominates a niche market
- Sector-leading earnings growth
- Potential takeover target
- Rated slightly higher than peers
- Its main market is small
Penna does straightforward recruitment, from campaigns and large resourcing projects to individual executive searches, and the increasingly common and highly lucrative headhunting of interim executives. Major long-term contracts with supermarket chain Aldi, the Metropolitan Police and the Secret Service helped to boost net fee income by 30 per cent and almost triple profit to £3m in the 12 months to March.
But the company's key differentiator is its position as the UK's leading 'outplacement' firm - helping a company's sacked employees find new jobs. Outplacement isn't a huge market, but Penna has 34 per cent of the UK's, where it managed to increase profit 7 per cent last year. The division helped the company clean up in the credit crunch when half the City was being laid off, and has recently been busy winning mandates from the troubled retail sector. Crucially, outplacement also provides a natural hedge to the normal recruitment cycle.
Indeed, a recent deal in the sector suggests Penna would make a good takeover target. Last month, a US-based outplacement specialist, Risesmart, was bought by Dutch human resources giant Randstad (Nl:RAND) for $100m (£65m), about 10 per cent above Penna's market value. A lack of publicly available financial data on Risesmart makes a valuation difficult but, owing to its need to diversify, Randstad is likely to have paid a premium for the group. That chimes with a recent report from investment bank JPMorgan suggesting that large recruiters building or buying an outplacement division would be highly rated.
If Penna wasn't diversified enough, it has also invested in a talent management division through the acquisition of Savile in November 2013. Although the division made a £0.5m loss last year, broker Panmure Gordon expects it to break even in the 12 months to March 2016, and produce an operating profit of £0.7m by 2017-18. Rather like the connection auditors strive to build with finance directors, Penna's links with the human resources teams at its 1,500 clients put the company in an excellent position to cross-sell services.
| PENNA CONSULTING (PNA) | ||||
|---|---|---|---|---|
| ORD PRICE: | 232p | MARKET VALUE: | £59.9m | |
| TOUCH: | 225-232p | 12-MONTH HIGH: | 232p | LOW: 121p |
| FORWARD DIVIDEND YIELD: | 3.4% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 76p* | NET CASH: | £2.3m | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 66.6 | 2.2 | 7.5 | 2.0 |
| 2014 | 69.0 | 0.1 | -2.1 | 3.0 |
| 2015 | 84.4 | 4.6 | 15.4 | 6.0 |
| 2016† | 89.6 | 5.5 | 17.2 | 6.9 |
| 2017† | 95.5 | 6.0 | 18.7 | 7.9 |
| % change | +7 | +9 | +9 | +14 |
Normal market size: 1,000 Market makers: Beta: 0.3 *Includes intangible assets of £19.7m, or 75p a share †Panmure Gordon forecasts | ||||
