Growth-hungry investors ready to back staffing sector – City Comment
22 May 2014
Over the last few months we have been asked more and more whether the public equity markets are interested in staffing companies. The answer would appear to be yes.
Thu, 21 May 2014 | Adrian Kearsey, head of small cap research, Sanlam Securities UKOver the last few months we have been asked more and more whether the public equity markets are interested in staffing companies. The answer would appear to be yes.
Proof of this can be seen in the strong share price movements across most of the sector. Over the last year we have seen the sector share prices jump. For example, Empresaria has seen its share price increase 54%, Harvey Nash by 72%, Matchtech by 81%, while Staffline’s share price has more than doubled (106%).
In a number of instances these price increases have occurred with very few shares traded and small volumes squeezing the market higher. A classic case of more buyers than sellers (but not very many of either). That said, recent fund raisings by Matchtech and Staffline show that there is real appetite from large institutional investors to back management and to fund growth.
Last September Matchtech raised £4m by placing 1.05m shares at 405p (today they are 615p). The money was used to finance the Application Services acquisition, a niche technology recruitment business based in London. More recently, Staffline raised £16m by placing 2m at 800p (today they are 900p). Impressively, investors paid a 4% premium to the prevailing share price. This money was used to finance the acquisition of Avanta, the UK’s third largest welfare-to-work provider. The deal is strategically significant for Staffline and management hope that it increases its chances of winning further long-term government contracts.
These fund raisings demonstrate there is appetite by investors to fund growth of companies that are publicly quoted. However, it has been many years since we have seen any significant IPO [initial public offering] activity within the staffing segment. Are investors going to finance a recruitment float? In our view – probably yes.
Whilst the IPO market is likely to soon close for its usual summer break, the overall level of sentiment remains positive and we expect the IPO market will return in the autumn.
So, what are investors looking for? Of course, everyone is different. Some like risk. Others do not. Some want international exposure. Others prefer domestic businesses. So there is no ‘one size fits all’. However, within the staffing segment the market wants to back businesses that have the ability to grow. They recognise the ultra-cyclical nature of the industry but want to see a management team and a strategy, which ‘through the cycle’ can deliver positive growth.
At the moment perm-led businesses are enjoying higher valuations when compared to temp businesses. Proof of this can be seen in the premium rating for Robert Walters and Page Group, when compared to Hays. However, the relative performance of Hays versus Page over the last few months demonstrates the market preference is marginal. Moreover, the Matchtech and Staffline deals show investors are happy to back temp-led businesses.
Crucially investors want a clearly articulated strategy. They want to understand which markets are being targeted and why. Essentially, they want to back a management team and a business model that can successfully exploit market opportunities. In this regard, point of differentiation is paramount. Investors do not want to back ‘me too’ operations.
Proof of this can be seen in the strong share price movements across most of the sector. Over the last year we have seen the sector share prices jump. For example, Empresaria has seen its share price increase 54%, Harvey Nash by 72%, Matchtech by 81%, while Staffline’s share price has more than doubled (106%).
In a number of instances these price increases have occurred with very few shares traded and small volumes squeezing the market higher. A classic case of more buyers than sellers (but not very many of either). That said, recent fund raisings by Matchtech and Staffline show that there is real appetite from large institutional investors to back management and to fund growth.
Last September Matchtech raised £4m by placing 1.05m shares at 405p (today they are 615p). The money was used to finance the Application Services acquisition, a niche technology recruitment business based in London. More recently, Staffline raised £16m by placing 2m at 800p (today they are 900p). Impressively, investors paid a 4% premium to the prevailing share price. This money was used to finance the acquisition of Avanta, the UK’s third largest welfare-to-work provider. The deal is strategically significant for Staffline and management hope that it increases its chances of winning further long-term government contracts.
These fund raisings demonstrate there is appetite by investors to fund growth of companies that are publicly quoted. However, it has been many years since we have seen any significant IPO [initial public offering] activity within the staffing segment. Are investors going to finance a recruitment float? In our view – probably yes.
Whilst the IPO market is likely to soon close for its usual summer break, the overall level of sentiment remains positive and we expect the IPO market will return in the autumn.
So, what are investors looking for? Of course, everyone is different. Some like risk. Others do not. Some want international exposure. Others prefer domestic businesses. So there is no ‘one size fits all’. However, within the staffing segment the market wants to back businesses that have the ability to grow. They recognise the ultra-cyclical nature of the industry but want to see a management team and a strategy, which ‘through the cycle’ can deliver positive growth.
At the moment perm-led businesses are enjoying higher valuations when compared to temp businesses. Proof of this can be seen in the premium rating for Robert Walters and Page Group, when compared to Hays. However, the relative performance of Hays versus Page over the last few months demonstrates the market preference is marginal. Moreover, the Matchtech and Staffline deals show investors are happy to back temp-led businesses.
Crucially investors want a clearly articulated strategy. They want to understand which markets are being targeted and why. Essentially, they want to back a management team and a business model that can successfully exploit market opportunities. In this regard, point of differentiation is paramount. Investors do not want to back ‘me too’ operations.
