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Parity ripe for re-rating as payback nears for hard miles

“We want to be a seen as a consultancy supported by an effective recruitment business"
People sitting
No-one sits on the bench at Parity

After two years in charge, Alan Rommel is confident the market’s perception of IT group Parity PLC (LON:PTY) is set to change.

“We want to be a seen as a consultancy supported by an effective recruitment business not a recruiter that dabbles with consultancy.”

WATCH: Parity Group: The 'best-kept secret' in recruitment and consultancy

A subtle difference, possibly, but one he believes will put some zip back into Parity’s standing in the stock market.

Change of perception

Why this is important to Rommel is easy to spot.

Parity is valued at a miserly eighth (0.12x) of annual sales and even with the low margin tag attached to the recruitment side that looks exceptionally harsh.

Numbers, too, suggest he might be right.

Recruitment accounts for 90% of revenues, but a third of profits come from consultancy and as this becomes financially more important, and recognised as such, the shares should respond in kind.

That is Rommel’s view and he should know pretty well how the business ticks.

A veteran of the recruitment arm, Rommel became chief executive at a time when the group’s attempts to diversify into digital marketing had faltered.

The plan since has been to strip the business back to its core competencies and that essentially means data.

A growth market

“Data is a high growth market and something we understand,” he told Proactive.

“Digitisation continues apace and with it the need to sort and understand the numbers.

“Services that are driven by the internet and mobile are not only heavily reliant on data, but also generating enormous volumes.

“Data is coming from multiple sources but it is useless unless you can analyse it a meaningful way.

“We work out what information is useful and generate commonality to interrogate that data. Tools are the easy bit at the end.”

Parity’s business divides between its recruitment/contractor arm and the consultancy business.

Greater harmony

A key plank of the rejuvenation plan has been to generate more harmony between the two.

From three offices spread around London, all of the operations are now under one roof.

Co-operation and collaboration has improved markedly as a result, as has the amount of business coming to the group.

The number of large active consultancy clients has risen to 21 from seven, with half of the new clients also using Parity’s recruitment side to provide contractors.

It’s a major shift in attitude internally says Rommel and also makes perfect sense.

“It’s much more effective. The benefit of someone working on a project is they get an insight into what is really needed.”

Parity can also provide consultancy clients contractors from the recruitment arm and so it does not have to keep a large and costly ‘bench of available staff’ and has access to a huge range of talent to scale at pace when necessary.

Customers include government departments and other public bodies ranging from the Ministry of Defence through to the NHS, Government Scotland and various universities, while tobacco giant British American Tobacco is also a long term customer.

Profits rising

Even with a wobble on the recruitment side in April caused by IR35 tax reforms on the public sector (some 50% of the recruitment contracting business), earnings have been picking up.

Operating profits rose to £684,000 from £551,000 in the half year to June 17 compared with H1 2016, on a like-for-like basis.

A trading update in December also indicated operating profits would grow by a double-digit percentage over the full year and overall be better than expected.

A higher contribution from consultancy is clearly one reason for that, though the recruitment side has also bounced back from the IR35 issues.

Debt has fallen again, having already dropped from £7.5mln at end 2015 to £2.3mln in June and Parity must now be close to being borrowing free.

Alongside reducing debt, the aim is to push hard to get consultancy’s contribution to over 50%.

Partly that will be through organic self-funded growth, but also possibly through a fund raise to ‘supercharge’ the consultancy arm.

Broker upgrade

WH Ireland’s forecast is for £84mln of revenues for the year just ended and profits of £1.7mln, which again makes a market cap of £11mln at 10.9p look pretty lowly.

The broker upped its estimates after the latest update and suggests profits can rise to £1.9mln in 2018 and £2.2mln in 2019.

Parity is being valued some way below what it sees as fair value, concluded WHI.

Annual results are due soon and confirmation that the business is now a lot more profitable than previously should help kick-start a re-rating.

 

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