BALANCED GROWTH
Empresaria looks strikingly inexpensive on a 2016e PE of 9x (Capital Network forecast) for a stock which keeps delivering strong double-digit EPS growth (2015: 24%, 2014: 29%, 2013: 24%, 2012: 25%).
In this report we provide a brief refresher on the growth model and the reasons we believe it will keep on delivering in the coming years.
The company describes itself as an international, multi-brand, specialist staffing group, and we argue that the success of Empresaria’s strategy reflects its leverage to one major secular growth trend – the emergence of flexible employment practises in higher-skilled job functions across many global markets.
In addition to this structural growth trend, you have a measured, accretive acquisition strategy, and a programme of continuous profitability enhancement that still has some headroom for further gains. Taken all together, it’s a balanced EPS growth story.
PROVING RESILIENCE
The company will provide a trading update January 21st, and we believe this could provide evidence of the sustainability of Empresaria’s earnings growth, ahead of the full results release March 2nd.
The key thing to consider is that 2016 has been a tougher year for the wider staffing services sector, with several sector peers issuing profits warnings or weak guidance. A solid update from Empresaria would help to confirm that this company is a structural growth business and not merely a cyclical one
VALUATION – THE FALSE BENCHMARKING SYNDROME
We’d argue that a stock with consistent double-digit EPS growth should normally trade on a P/E in the teens rather than the 9x currently afforded to Empresaria. The problem is index benchmarking lumps Empresaria together with enterprises that are essentially UK temping agencies. Whereas Empresaria is neither UK-focussed (35% EU ex-UK, 35% RoW, by Net Fee Income 2016e) nor does its business model resemble the high-volume low value-add generalist agencies.
We recognise that the stock market likes to anchor valuations to some kind of benchmark, and we don’t expect the shares to re-rate instantaneously. But, by way of an illustration of the potential upside, we note that if the company delivers our 13.5p EPS for 2017e, and the market rewards this with just a re-rating from 9x to 10x P/E, that would get you 135p as a December 2017 share price.
THE GROWTH MODEL
Empresaria is an international, multi-branded, specialist staffing group. The “specialist” part of this is a big differentiator when comparing Empresaria against generalist temporary staffing agencies. There is a secular trend across many geographies towards flexible working in higher skilled job functions which traditionally eschewed contract-worker and temporary worker arrangements – for example professional services and financial services, skilled engineers, doctors, airline pilots, and specialist IT.
The company describes its philosophy as “inch wide, mile deep”, meaning that the focus is on building the depth of expertise to be a market leader in each of its chosen niches, rather than spreading out to become a generalist.
Within this framework there are four avenues of growth:
- Expand an existing brand’s penetration in its current niche by adding headcount
- Expand an existing brand into new sectors or geographies
- Grow an existing brand with a bolt-on acquisition
- Make an investment in a new market vertical or new geography
ORGANIC GROWTH
The company is positioned to benefit from a structural growth driver of evolving working practises. The temporary staffing business has remained the main focus of the group. Growth niches include mature economies where temporary work is an emerging trend at the high-skill end of the market, and developing economies where the higher-skilled job market itself is growing fast.
INVESTMENTS
The company made two investments in 2016 – Rishworth in the airline pilot leasing sector, and ConSol partners in specialist IT (including cloud technologies, mobile, cyber security). The airline sector is a new niche, whilst IT is an expansion on an existing niche. Both have strong management teams who remain as stakeholders in their enterprises. And, as with many of Empresaria’s investments both came on attractive multiples that make the deals earnings accretive to Empresaria from year 1.
MARGIN ENHANCEMENT
The final driver of Empresaria’s EPS growth has been continuous improvement in the Conversion Ratio – Operating Profit into Net Fee Income. This ratio has been steadily improving in recent years, to reach 16.3% in 2015, driven by proactive cost control and by growth in Net Fee Income leading to better cost absorption. But this still leaves some headroom to reach the group’s target ratio of 20%, which should lead to a useful additional contribution to EPS growth in the coming years.
CONCLUSION
We believe that the combination of the three factors – organic growth in fee income, external investments, and profitability enhancement – should give investors some confidence that Empresaria is delivering not just strong earnings growth, but also sustainable and balanced earnings growth.