Small Caps | Jul 03 2019
This story features PEOPLEIN LIMITED. For more info SHARE ANALYSIS: PPE
People Infrastructure has been busy with acquisitions since its IPO, with brokers noting the higher profile in the attractive healthcare and IT sectors.
-Offers full solutions in recruitment, training and payroll, unique in disability sector
-Increased exposure to healthcare de-risks the business
-Margins likely to expand based on changes to revenue mix
By Eva Brocklehurst
People Infrastructure ((PPE)) has broadened its reach and is now more exposed to sectors where there is high employment growth. Around 70% of the company's earnings are now generated from the healthcare and IT sectors versus 35% at its IPO.
These sectors have leading rates of projected employment growth across the Australian economy over the next five years. Demand for these services is underpinned by trends such as an ageing population and digital expenditure. People Infrastructure also services some of the largest providers in the disability sector.
A catalyst for the business is the likely outcome of the Royal Commission into Aged Care and Disability. Likely outcomes, Moelis contends, include higher staffing levels, increased government funding, more compliance requirements and regulatory oversight. Margins and returns are increasing as the company's revenue mix shifts away from blue-collar employment.
People Infrastructure offers solutions in recruitment, training, roster management, payroll and reporting. Acquisitions provide further accretion as well as scale benefits and can be obtained at below the cost of capital. Approximately 20% of the nursing talent pool are immigrant workers, often highly transient.
The company can provide work for these employees in multiple locations with a high degree of expertise in managing the human resources function for its healthcare businesses, Ord Minnett suggests. A big uptick in demand could be on offer with the opportunity to provide a similar service to national aged care providers.
Since its IPO, when the business was heavily concentrated in blue-collar Queensland segments and disability in NSW, People Infrastructure has acquired six new earnings streams at an average purchase price of around 4x operating earnings (EBITDA) for a total of $46m.
Value is being extracted via cost synergies, leveraging existing infrastructure to increase efficiency, and revenue synergies from cross-selling candidates by experience, geography and product.
Recent acquisitions include two Queensland nursing agencies for $16.8m, collectively expected to generate $3.4m in operating earnings across the next 12 months. Ord Minnett expects the agencies will open up a new vertical for the company, providing greater scale and geographical diversity.
From now on the broker expects the company will focus on integrating its new operations in order to drive organic growth. Ord Minnett believes the increased exposure to healthcare de-risks the business and maintains a Buy rating with a target of $3.50.
However, Moelis deems there is a high probability of one-two accretive acquisitions in the short to medium term, likely to be in healthcare. The company's largest competitor is Healthcare Australia but according to People Infrastructure there is no direct competition for its full workforce solution within the disability/community care sector.
In June, the company acquired the Halcyon Knights business for $13.5m, which provides IT recruitment across several verticals. Based on this acquisition Morgans increases FY20 estimates for earnings per share by 16%. The broker maintains an Add rating and $3.10 target. Morgans estimates debt capacity for further acquisitions of $8.5m, based on FY20 forecasts.
Organic earnings growth is 7-8% per annum from existing clients. Moelis expects the operating earnings margin to grow to around 8.5% by FY21, supported by a greater mix of higher gross margin revenue. Free cash flow per share is expected to increase by over 45% in FY20. Moelis initiates coverage with a Buy rating and $3.55 target.
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