Penna a choice pick

Importantly, independent of the takeover factor, we believe Penna is a sound investment, which is why we tipped the company in October. Since then, it has reported strong first-half trading, which caused house broker Panmure Gordon to upgrade full-year earnings expectations by 10.5 per cent. And economic uncertainty in 2016, which has recently knocked the sharse of mainstream UK-listed staffers, should help highlight some key attractions of Penna's business model.

That's because the group is the leading 'outplacement' firm in the UK. For those who don't work in human resources (HR), outplacement involves helping a client's former employees find new jobs. It's a small but growing portion of the multibillion pound staffing industry, and a market Penna commands a leading 30 per cent share of in the UK. Its career services outplacement division, which accounted for 44 per cent of net revenues last year, cleaned up during the financial crash when swaths of City staff were laid off, and it has recently been busy winning mandates in the troubled retail sector. This natural hedge to regular recruitment demand generated £1.8m in operating profit in the six months to October 2015.

While Penna expects to continue to win new outplacement mandates from local authorities, retail clients and police forces, its recruitment business, which accounts for 43 per cent of net revenues, has been the standout performer so far this year thanks to strong client demand and a growing appetite for consultancy-led recruitment. The division boosted net revenue by a quarter in the period, with operating profit up 16 per cent to £1.6m. Recent work for client GCHQ demonstrated Penna's skills on this front, after a guerrilla marketing campaign to hire 1,900 new spies went viral.

Elsewhere, the previously lossmaking executive talent management division broke even in the six months to September, beating forecasts. Chief executive Gary Browning is confident these services will soon be a major contributor to group profits, as the division hopes to double annual revenue to £10m. An executive headhunting offering also puts Penna in an excellent position to cross-sell services to the HR teams at its 1,500-plus clients.

These kind of niche services seem to be what acquisitive global staffing groups are looking for, too. Last March, Adecco, the largest staffing group in the world, bought Canadian outplacement firm Knightsbridge Human Capital for CAD$80m (£35m). Six months later, a US outplacement group called Risesmart was acquired by Dutch staffer Randstad for $100m (£65m). A lack of publicly available financial data on Risesmart makes a valuation difficult, but analysts believe Randstad is likely to have paid a premium, especially given Risesmart's digital offering. Penna, too, is currently developing an affordable digital service for public sector clients, which are being forced to make major cuts.

The deals also chime with a recent report from JPMorgan, which suggested outplacement can reduce recruiters' cost of equity and justify a valuation premium. Accordingly, a potential offer for Penna might also come with a sweetener.

Average global M&A values spiked in 2015 to more than 15 times cash profits. Even a slightly less puffed-up takeout multiple of 13 would put a value on Penna of £91m based on this year's cash profits forecasts of £7m and ignoring the net cash of £4.2m. That's a 23 per cent premium to its current market capitalisation. What's more, we think there is scope for further upgrades to forecasts, especially if the executive-talent business can be moved into the black.

Another important company-specific reason why Penna could attract a buyer is chairman Stephen Rowlinson, who's the largest shareholder with a 30 per cent stake. At 75, he may be starting to think about cashing out. The recent deals in the sector suggest that were he looking for a chance to exit and realise the maximum gain from his holding by doing a deal with a suitor for the business, the time is ripe.