Had to check the calendar today to make sure it wasn't Thursday as there were so many results and announcements. Any way the ones that featured from stocks I have mentioned in the past were - Cineworld, which I trailered yesterday, Rolls Royce and Hill and Smith. While yesterday I caught up with the webcast of the Equity Development meeting with Matchtec and I include a few thoughts on that at the end of today's news.
In a busy day for company news we have had final results for Matchtec (MTEC) today, which I flagged up the other day and at first glance they seem up to or slightly ahead of expectations. Group turnover came in slightly ahead of £499.3m forecast at £503m while their adjusted diluted earnings came in at 43.3p v 42p forecast for a modest 3% beat, although I note that the consensus had come down from 42.65p in August after their year end trading update. So it seems that they are not only cautious in their commentary but also manage expectations quite well. On the dividend they also beat expectations by delivering a 12% increase in the final to 16.32p (3.23% yield on that alone and a 10% increase for the full year to 22p versus the 21.4p that was forecast. This was 2.1x covered by earnings and seems to back up their bullish outlook statement with hard cash.
Talking of which, the balance sheet saw debt come in at £33.6m despite the cash portion of the consideration for Networkers of £29.2m and the £8.4m of debt which came with it. This was helped by the strong cash generation of £20.8m on the back of an operating cash conversion rate of 124% up from 115% in the previous year. This debt seems manageable, given the cash generative nature of the business and in the context of the £150m market cap. It also represents 1.9x this years EBITDA which is also within normal ranges that bank covenants look at & I note that they have a £95m facility available in any event suggesting plenty of headroom.
In the statement they suggest that engineering markets remain buoyant and they backed this up by reporting 24% growth in that sector. Meanwhile they say the transformational acquisition of Networkers International, which boosted these figures, is on course to deliver the expected synergies by 2017 as the integration there remains on track. On this they say the Group is realising cost synergies from the combination which they quantify at £1.3m in 2016, although they do say they are reinvesting some of these savings into sales and marketing, regional management and connectivity for some international offices to
improve the business, so not all the savings will drop though to the bottom line. I see that a broker is suggesting that maybe a third to a half of these will be reinvested. There are apparently also early signs of sales synergies coming through with more expected next year.
On the outlook the Chief Executive said "we regard all our international locations to be a huge opportunity to advance our activities in local and regional markets across the world and are planning for substantial growth over the next few years. " He went onto say that as a result he believes they will be able to deliver enhanced shareholder value and improved returns. They also highlight the increased global reach of the group on the back of the acquisition and how this will help them meet the changing needs of their clients. They also suggest that the deal brings them into a new market for providing technicians for the internet of things as they see existing connected car technology spreading into avionics and maritime.
This all sounds quite bullish talk for what is normally a fairly cautious and understated management, so hopefully the seeming promise of the new combined business will match these expectations going forward from here. In a separate announcement today they also named a new non executive chairman with effect from December.
Summary & Conclusion
A good set of numbers from this small (£150m market cap.) and increasingly international recruitment company on the back of a transformational deal which they are bedding in as expected. It seems that earnings may not be upgraded that much yet but may edge up to say 48 p and I suspect dividend forecast will probably edge up to around 24p or so to reflect the 10% growth delivered this year and a 2x cover say. On this basis the share at this mornings 505p are trading on 10.5x with a well covered 4.75% yield.
I reckon this leaves scope for a re-rating if they can deliver on the promise of the combined group that they are highlighting in this statement. I note in the marketing material issued by Equity Development (ED) today (which I attach below) that the sector average yield is 2.9% - so if you used 3% then that could suggest a target price of 800p if it got re-rated to that kind of yield. This would also represent a not impossible 16 to 17x PE.
In the note ED suggest the shares are cheap in both absolute and relative terms and have upgraded their price target to 705p from 680p based on a sum of the parts calculation and an 11x EV/EBITDA rating compared to a sector average of 12.9x. I note that if this multiple moved closer to the sector average then that could also suggest a target price around 800p+.
Thus with a potential for the shares to re-rate up to the 700 to 800p range in the medium term I have been happy to accumulate more shares at these levels. This will not obviously happen over night and may well require some patience as demonstrated so far this year with this one which has been somewhat lacklustre in terms of price performance.
Provided economies and employment markets remain strong then I see no reason whey this one cannot make some progress in the short term from its currently oversold position, at least some way towards matching my price expectations. With this years likely dividend growth of 10% and the 4.75% yield suggesting a minimum expectation of around 550p and a total return of at least 15% in the next year or so in the absence of any change to the rating. This is after all where it was trading as recently as September this year.
We have had a full year trading update from Matchtec Group (MTEC) a small recruitment agency which I have written on in the past. By way of reminder they describe themselves as follows:
The UK's leading specialist Engineering, IT and Telecoms recruitment agency, providing contract, temporary and permanent staff. Established in 1984 and AIM-listed in 2006, the Group is one of the fastest growing staffing organisations listed in the UK, with a well-balanced business model; approximately 70% contract and 30% permanent. Recruiting in over 100 countries across the world from 18 offices in 12 countries, the Group has over 580 sales staff, with over 9,000 contractors on assignment and places 4,000 candidates into permanent positions each year.
In April 2015, Matchtech Group announced the completion of the acquisition of Networkers International, a global recruitment company specialising in the delivery of recruitment services focussing on Telecoms and Technology. The combined group is well-placed to take advantage of the convergence between Engineering, Technology and Telecoms skill sets and creates a specialist recruiter, of scale, in the UK and internationally.
In the update today they suggested that their profits will be in line with current market expectations (which were upgraded by about 4% since April) and this includes a 4 month contribution from Networkers International. This helped to boost the Net fee income by 22% year on year, but the underlying growth seemed pretty sluggish. The commentary was also fairly understated with them saying they hoped to return to net fee income growth by the second half of 2016 for example. I guess an understated style is maybe better than a management team who hype everything up, but does leave something of an underwhelming feeling about the update despite the fact that they have met upgraded forecasts. Hopefully they are under promising so they can then over deliver as they go forward from here perhaps?
Consequently it is not surprising, given the shares had got overbought prior to today's update, to see them off this morning as there was nothing in the announcement to get the market excited in the short term. So it looks like more of a hold up here and something of a slow burner, but they do still look reasonable value on about 12x with a 4% yield for the coming year to July 2016, assuming the management can deliver the promised cost savings and the fee income picks up as they expect or perhaps even faster if they are being overly cautious in their commentary.
Apologies for no post yesterday as there was not much news and I was preparing for and featuring in a Podcast. This was the ADVFN Podcast that I have mentioned in the past and which is hosted by Justin Waite. I talked about potential price targets in Matchtec (MTEC) which should have a year end update out next month and suggested Aberdeen Asset Management (ADN) as a contrarian recovery play if the Greeks should manage to agree a rescue deal this weekend prompting a relief rally in the market, perhaps.
If that is of any interest you can access the podcast here and my bit comes in at around 13 minutes 30 seconds. It was quite an interesting experience as I had been toying with the ideal of maybe doing some podcasts for the Compound Income site. So if you listen to it and think you might find something similar useful here in the future, then do let me know either in the comments or by getting in touch. If it seems like there is a demand for it I'll then see if I can work out how to do it!
Any way there is not much news around to day either so I don't have a lot else to say, but here we are another freaky Friday and an anxious wait to see the outcome of the latest Greek drama. Seems a bit odd to me as the government and the electorate seemed to say no to more austerity and supposedly therefore to staying in the Euro and here they are back with em - more austerity proposals to stay in the Euro, albeit they are also looking for some debt forgiveness in return. Thus the Euro project reminds me of that classic Eagles song - Hotel California (click link to listen).
"The pink champagne on ice
And she said "We are all just prisoners here, of our own device"
And in the master's chambers,
They gathered for the feast
They stab it with their steely knives,
But they just can't kill the beast
Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
"Relax, " said the night man,
"We are programmed to receive.
You can check-out any time you like,
But you can never leave! "
Seems to fit or you could try one of the Eagles lesser known tunes here which is also vaguely appropriate. So there you go, I've got to rock on as the garden, the test match and Wimbledon beckon today and I'm off to a concert at Kew Gardens over the weekend. So whatever you are up to this weekend, have a good one and lets hope we can enjoy some more Euro fudge next week before another Greek crisis in about three years presumably.
PS. The Scores have also been updated to last nights close.
& over the entire professional sector, pay is up 1.9 per cent on average compared with April last year. Within this demand is highest for engineers where vacancies – temporary and permanent – are up 20 per cent and salaries have risen 6.3 per cent over the past 12 months.Source: Association of Professional Staffing Companies (Apsco), see this report.
Meanwhile UK technology companies’ hiring has reached a record high despite the industry reporting slower growth in business according to a UK business activity index published today by consultants KPMG and financial information firm Markit. Tech sector employment index rose to 57.8 for the first three months of the year, up from 55.3 for the final three months of 2014. It’s the fastest job creation recorded by the survey since it began in 2003, see this report.
All sound pretty positive for Matchtech (MTEC) which I have written about a couple of times this year here and here.
I still think this one is good play on the recovering economy and labour market plus the benefits of it's acquisition of Networkers international to come. The shares have not moved that much and are still cum the interim dividend of 5.68p until 28th May 2015 and trade on around 11x with a 4%+ yield for the year to July 2016 and have a Compound Income Score of 95. There you go two posts in one day - obviously got over my lethargy - off to do some exercise now!