Staffline: 210% so far but there is more to come

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I first recommended shares in AIM listed Staffline Group (LSE:STAF), a provider and manager of industrial workforces which operates from more than 190 locations in the UK, at 77.5p in March 2010. The payment of a 3.1p per share interim dividend on 9th November – as declared in the company’s results for the first half of calendar 2012 released last month – will take dividends received since the initial recommendation to 18.1p per share and the shares currently trade at 225.5p. So clearly this is no disaster – it has been a bit of a red hot penny share for me with a total gain of 210% so far. But what to do now?

© Tom Winnifrith

Its half calendar year results published on 3rd September, saw Staffline report an adjusted pre-tax profit of £3.59 million, generating earnings per share of 12.4p. The profit was slightly lower than in the comparative prior year period (£3.74 million) as an increase in profit in the core recruitment business was offset by a combination of start-up costs on a number of contracts and anticipated losses from within the company’s ‘Welfare to Work’ division. However, Staffline noted that the trading performance of that business was “slightly ahead” of its estimates and that it remains confident that the business will make a positive impact on group profitability in 2013.

Six month revenue was £163.92 million, with net debt at the period end totalling £8.39 million. However, net current assets increased by £2.20 million during the period, to £7.32 million, with non-current liabilities reduced by £1.09 million, to £5.88 million. The company noted debtor days remained steady at December 2011 levels – with a £3.33 million increase in trade receivables attributable to growth in sales from acquisitions and new customer wins.

The balance sheet is thus in robust shape and, looking ahead, although describing the general recruitment sector in the UK as remaining an extremely competitive environment, Staffline “remains confident” that it will meet current market expectations for the full year. Its confidence is reflected in a near 7% increase in the declared interim dividend and its house broker, Liberum, has full-year earnings per share of 34.5p pencilled in for calendar 2012, rising to more than 40p next. Clearly there is some macro economic-related risk to the company delivering this growth, although its results have continued to show that a focus on ‘blue collar’ work and delivering operating efficiencies to client organisations (whilst enabling them to focus on managing their core businesses) is an attractive proposition in the prevailing economic climate. As such, despite our returns to date, the rating continues to look much too low – a 2013 earnings multiple of little more than 5.5x for potential earnings growth of 16%+. At up to 250p, the shares look worth continuing to buy. Fair value should be at least 320p.

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