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Staffline woes more than temporary

The recruitment and training group has warned that 2019's earnings will fall short of expectations
May 20, 2019

Staffline's (STAF) already tumultuous year has gone from bad to worse as weaker than expected trading forced the recruiter to warn that adjusted earnings before interest and tax (EBIT) would come in between £23m and £28m this year, far below analyst consensus estimates of around £43m. As recently as April, the group had anticipated an underlying trading performance "in line with expectations". Management's revelation wiprf as much as half from the group's market value in just one day. 

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With the looming spectre of Brexit continuing to adversely impact the UK labour market, a number of customers are transferring a “significant volume” of their temporary workforce into permanent employment. Although this reaction to economic uncertainty typically recedes over time, the group expects challenges in temporary recruitment to persist throughout 2019. Notable migration from “temp to perm” has taken place in the higher margin driving sector (where the group supplies HGV drivers), compressing overall margins. Compounding the group’s woes, reduced demand in the automotive sector and the associated supply chain has been higher than expected.

In the PeoplePlus segment, with the transition from a work programme provider to a skills and training organisation close to completion, the group maintains a “positive outlook” – some 60 per cent of revenues have already been contracted for 2020. However, 2019 performance will be hindered by slow national uptake of the apprenticeship levy scheme, particularly in retail.

To make matters worse, the protracted postponement of its 2018 full-year results has caused new contract momentum to slow. Following allegations from a third party regarding “invoicing and payroll practices within the recruitment division”, shares nosedived by a third at the end of January before being suspended. Trading resumed on 12 March, amidst a (now completed) independent legal investigation and ongoing extended audit. However, with lingering questions over historical compliance with national minimum wage regulations, results are yet to be finalised as the group engages with HMRC to quantify potential underpayments to workers in “a limited number of food production facilities” over a number of years prior to 2018.

House broker Liberum has slashed its target price from 1,320p to 800p, downgrading its 2019 trading forecasts by 46 per cent – it now expects adjusted pre-tax profit of £21.7m and EPS of 65.6p. Net debt is forecast to surge from £52m to £85m, with the dividend halved in 2019, it expects.