Shares in Staffline Group (LSE: STAF) shot up by 18% when markets opened this morning, after the staffing firm announced a £34.5m deal to acquire A4e Limited, a training provider that operates a number of large welfare to work programmes for the government.
The deal means that Staffline will become the largest provider, by geographical coverage, of Work Programme schemes.
The firm hopes that these large, government-funded contracts will help drive long-term growth, but how does the newly-enlarged Staffline compare to its larger peer Hays (LSE: HAS), which offers similar growth potential and more diversity?
The A4e deal in detail
Staffline’s payment of £34.5m equates to 2.5 times A4e’s earnings before interest, tax, depreciation and amortisation last year, which seems fairly reasonable to me.
The purchase will be funded by new debt facilities, substantially increasing Staffline’s net debt.
However, A4e is expected to report pre-tax profits of £10.2m for last year. Given that Staffline’s adjusted pre-tax profits were only £18m last year, the acquisition of A4e could transform the firm’s bottom line and enable the firm to reduce its debt levels again quite quickly.
Staffline vs. Hays
Staffline’s management estimate that the acquisition of A4e will increase underlying earnings per share by 26% for the current year.
In contrast, Hays earnings per share — without acquisitions — are expected to rise by around 19% this year.
Using the numbers in today’s press release and last year’s figures, here’s how the A4e deal could affect Staffline’s 2015 figures — and how the smaller firm compares to Hays:
|
2015 forecast |
Staffline pre-A4e |
Staffline plus A4e |
Hays |
|
Revenue |
£565.9 |
£706m |
£3,866m |
|
Adj. earnings per share |
69.3p |
87p |
7.4p |
|
P/E |
11.6 |
10.9 |
20.9 |
|
Yield |
1.9% |
1.6% |
1.9% |
I reckon Staffline shares still look attractively priced after today’s deal news, despite their 18% rise. I’ve assumed that this year’s dividend remain at current forecast levels, as Staffline’s increased debt load could mean less free cash for shareholder returns.
Staffline’s operating margin has fallen from 3.4% in 2010, to just 2.2% in 2014, but my calculations suggest that today’s deal could reverse much of this decline, which could eventually support a higher P/E rating for the shares.
Hays already enjoys a superior 4% operating margin, but with a 2015 forecast P/E of 20, a lot of growth already seems to be reflected in the price.
Overall, I believe Staffline could be a better buy than Hays in today’s market — although management will need to prove that they can deliver the promised benefits to shareholders, while keeping debt levels under control.