Profits are booming at this cash-rich recruiter

Gattaca (GATC:81p), the specialist science, technology, engineering and mathematics (Stem) recruitment business, flagged up its ongoing recovery in a pre-close trading update last month (‘Four bargain shares where good news is rewarding investors', 23 February 2023).

The move into profit was driven by stand-out performances from energy (operating profit doubled to £1mn on 9.5 per cent higher revenue of £21mn), defence (profit of £1.1mn from break-even on 20 per cent higher revenue of £38.9mn) and infrastructure (profit of £0.3mn reversed a loss of £0.7mn on 4 per cent higher revenue of £74.7mn). The three segments accounted for 69 per cent of group revenue in the first half and are benefiting from demand drivers that are likely to persist.

For instance, resource demand in the defence sector increased 15 per cent in the first half, and the UK government has just committed to higher defence spending in the recent Budget. Pressures on global energy production and the transition to renewables are playing to Gattaca’s strength, too, as is exposure to major infrastructure projects (HS2, UK water market and highways). Strength from these three sectors more than offset weakness in TMT and the restructured international operations.

The improved financial performance also benefited from higher yields (average permanent and contracts fees up 6 and 9 per cent, respectively), improved productivity (net fee income per sales employee was 20 per cent higher), and reductions in third-party costs, property overheads and general cost savings. Importantly, attrition rates continue to improve under the new management team, a reflection of the change in culture. They have improved staff engagement, localised accountability and streamlined decision-making by cutting out layers of management across the sales business, which now employs 343 employees, or 69 per cent of the headcount.

Clear direction of travel

There is more work to be done, and the general economic outlook has led to some clients lengthening lead times. However, the group is winning contracts including a major one with easyJet, and direction of travel underpins Equity Development’s forecasts that point to a sevenfold rise in annual pre-tax profit to £1.8mn on NFI of £46.5mn.

Moreover, with the benefit of a slimmed-down cost base and restructuring overseas operations, the group’s operational leverage could be seen to full effect in the 2023-24 financial year when analysts expect a surge in pre-tax profit to £4.25mn on 9 per cent higher NFI of £50.6mn.

A rock-solid cash-rich balance sheet – net cash of £20.9mn (65p) backs up 80 per cent of Gattaca’s market capitalisation of £25.5mn – supports the reintroduction of a payout, too. Analysts are forecasting dividends of 1.4p (2023) and 3.3p (2024) paid from earnings per share (EPS) of 4.3p (2023) and 9.7p (2024). On this basis, the shares are rated on forward cash-adjusted price/earnings ratios of 3.7 (2023) and 1.6 (2024), and offer prospective dividend yields of 1.7 per cent and 4.1 per cent, respectively.

I suggested buying the shares, at 74p, in my 2023 Bargain Share Portfolio, and see scope for material upside. Buy.

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