Compound Income

Looking for opportunities...

6/2/2015

Failure to meet engineering skills demand to cost UK £27bn a year - click image to read more.

...as the market has been rallying again recently and challenging its old highs in recent years. Thus I have been trying to find stocks that might have been left behind or that have come back against this trend. I have noticed that many of these tend to be smaller companies and some which are listed on AIM, which is not always a good place to invest in but can offer up some gems.

So with that caveat I offer up a stock which falls into that category which was in the news recently and that may be worthy of further research. The stock concerned is called Matchtech (MTEC) which has a £126 million market capitalisation and is listed on AIM. They were in the news because they had an in line trading update, saw their CEO take early retirement and announced an agreed deal to buy a competitor called Networkers International (NWKI) for around £58 million with a mixture of debt and cash. They say that the deal should be earnings enhancing in the first full year of ownership and also bolsters their range of activities and the geographic scope so it seem like quite a sensible deal.

These are specialist recruitment companies operating in the engineering and technology areas where demand is high (see image & story above), although some parts related to oil & gas have understandably weakened recently. In addition to this, more general skill shortages seem to be pushing up wages but slowing hiring rates for agencies as reported in this Reuters story today. So they could be facing something of a slowdown from that and election uncertainty, which is maybe why they have done the deal to help offset these effects?

It is not a terribly liquid stock as the management have large stakes (which is good) and there are a few large institutional holders and as a result the free float, prior to this deal was quite limited at around 27%. In addition Networkers shares also had only about 33% freely available, but I guess some of their holders may cash out once the deal completes. This may afford a good buying opportunity, but nevertheless I think the shares look potentially interesting down here and may be worth watching in the weeks and months ahead.

So why is that, well the value looks acceptable for a Company of this type with the P/E for the year to July 2015 looking like around 13x with a 4% yield on the back of forecast dividend growth of 6 to 7%. They are also forecast to see growth next year which on current forecasts before any enhancement from the deal puts it on 11.6x with a 4.4% yield. The dividend on this one was cut during the downturn in 2008 but has started rising more recently as cover has been rebuilt. Given the large management stakes this gives me some reassurance that the dividend should be sustainable provided they do not over reach themselves before the next downturn.

Talking of which most recruiters have been reporting strong figures recently and the labour market in the UK certainly seems to be picking up. However, with the election coming up and presumably, whoever get in, will want to get their tightening in early in the parliament to align the economy with the electoral cycle as the Tories / Lib Dems. did after the last election. This I guess could take the gloss off of the labour market in the short term (see also Reuters story above), so again it may be worth waiting until later in the year on this one to see how that goes and how the deal beds down?

Aside from that looking at the shares at around 500 pence they have come back by around 20% from their peak last year and are looking over sold currently. However longer term they have soared, like some other small caps, from around 200 pence in 2012 so nothing to say they couldn't go down further and de-rate some more if the economy, employment and stock market should soften in the months ahead which might bring the possibility of getting them closer to say 425 pence (see second chart below).

Finally, I saw some research on them and the deal from Equity Development although I note is says that post MiFID this information is categorised as Marketing Material. This is probably because they have either been paid by the Company to produce it or they have some commercial arrangement with them in other ways. So with that caveat I attach the note below for more background if that is of interest to you and a Morningstar report at the end of this post, oh yes and some more music that seemed appropriate for today's topic - cheers have a great weekend.