There's more to come from this resilient recruiter

Gattaca (GATC:104p), the specialist science, technology, engineering and mathematics (STEM) recruitment business, has reported a major earnings’ beat.

In the 12 months to 31 July 2023, the group increased underlying pre-tax profit 10-fold to £2.5mn, significantly above Equity Development’s £1.8mn estimate. The outperformance was driven by a combination of cost savings and exiting low-margin contracts. So, although NFI from contract work (72 per cent of the business mix) was broadly flat year on year, the focus on the quality of earnings and margin meant that operating profit surged.

Resource demand in the defence sector maintained the 15 per cent growth rate seen in the first half, and prospects look robust after the UK government committed to higher defence spending in this year’s Budget. The group’s exposure to major infrastructure projects (HS2, the UK water market and highways) is also playing to Gattaca’s strengths, as highlighted by the 56 per cent NFI growth delivered by Gattaca Projects. Strong results from these sectors mitigated weakness in TMT and the restructured overseas operations.

Gattaca’s balance sheet is in fine fettle, too, with net cash rising 75 per cent to £21mn (66p), a sum that covers 62 per cent of its market capitalisation of £33.6mn (104p). Effectively, the operational businesses are in the price for less than five times annual operating profit. Reflecting the balance sheet strength and operational outperformance, the board plans to declare a 2.5p-a-share final dividend and a one-off special dividend of 2.5p a share at a cost of £1.6mn when the annual results are released on 24 October 2023.

Macroeconomic headwinds

The one negative is the ongoing macroeconomic headwinds impacting the wider market, and subduing demand and candidate sentiment across the permanent recruitment sector (28 per cent of NFI). This is slowing the speed of Gattaca’s ongoing recovery. Although management is increasing their focus on contractor growth to mitigate the short-term impact on permanent recruitment, contractor growth takes longer to be seen in NFI. It also means that the directors are guiding investors to expect marginal growth in pre-tax profit in the new financial year to 31 July 2024. Previously, Equity Development forecast pre-tax profit of £4.25mn based on 8.5 per cent growth in NFI. It is now expecting 13 per cent growth in pre-tax profit to £2.8mn on 4.5 per cent higher NFI of £45.6mn. On this basis, expect adjusted earnings per share (EPS) to rise 20 per cent to 6.6p.

That said, the group is clearly well-placed to take advantage of any recovery in the market, having a leaner and more efficient cost base than previously. Moreover, the fact that Gattaca’s share price jumped seven per cent following the trading update highlights that investors are looking at the bigger picture, not to mention the attractive earnings multiple and dividend yield.

So, having suggested buying the shares, at 74p, in my 2023 Bargain Share Portfolio, and reiterated that advice at 81p (‘Profits are booming at this cash-rich recruiter’, 30 March 2023), I continue to see scope for further share price upside. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.