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.