Small Caps | Jun 08 2023
This story features PEOPLEIN LIMITED. For more info SHARE ANALYSIS: PPE
PeopleIN’s strategic review failed to realise extra value, nor was a sale forthcoming, but brokers back the company’s decision to stay the course.
-Strategic review advises PeopleIN to stick with the plan
-Management reaffirms FY23 guidance
-Brokers observe strong tailwinds
-Immigration reforms something to look forward to
-And what about M&A?
By Sarah Mills
PeopleIN’s ((PPE)) strategic review suggested the company stick to its existing three-year strategy, focusing on resilient sectors with a long-term appetite for labour, cross-selling between brands and international recruitment.
The review was announced in November after the company posted disappointing FY22 result.
Petra Capital says it is reasonable to conclude that a sale of the business would have been canvassed in the process, and the failure of a deal to be announced suggests a satisfactory valuation could not be reached.
FY23 Guidance Reiterated
PeopleIN, which provides workforce management, contracted staffing, recruitment and human resources outsourcing services in Australia and New Zealand, reiterated FY23 guidance.
Management also pointed to strong organic growth in the half, the company recruiting more than 3,200 international candidates in the first half of FY23.
Organic growth is a good indicator for the underlying strength of human services and recruitment companies. Strong organic growth is also a comforting sign at a time when global capital is drying up and interest rates are rising.
Brokers report rising free cash flow generation in the second half and lower debt.
At December 31, 2022, the company carried net debt of $71.5m, leaving it room to raise capital if need be.
However, brokers believe the company has room to steer clear of a raising, given further dilution would likely be poorly received given a not-too-distant capital raising.
PeopleIN's earnings are easily covering interest expenses.
Tailwinds And Fundamentals Aligning
Most brokers agree that the business’s fundamentals are holding, despite rising interest rates and growing recession fears.
Not only is PeopleIN enjoying post-covid tailwinds, the company is benefitting from a nationwide labour shortage.
Australia’s unemployment rate, while rising to 3.7% in May from 3.5% in April, remains strong.
The monthly hours worked rose by 2.6%, pointing to continued economic momentum, say economists.
A few other ducks are lining up for the company. The Federal Government has promised to reform migration, streamlining processes, and has increased funding for the PALM scheme (Pacific Australia Labour Mobility), the NDIS and Mental Health.
Another $445m has been allocated to enable nurses and allied health professionals to work with doctors; $941m to aged care and home-care funding; $3.24bn over 10 years for Brisbane’s 2032 Olympics; and a boost to the skilled migrant intake to more than 70%, observes Wilsons.
Government reforms include fairer pay thresholds for incoming workers, which could also benefit recruiters.
Petra Capital observes PeopleIN is well diversified across industry sectors, enabling it to mitigate risk.
Most of the company’s business revolves around the verticals of health/community, industrial and technology/financial services.
What About M&A
Ord Minnett’s review of PeopleIN’s global peers shows that only three M&A deals above $100m were transacted in the year.
Still, the broker believes the company remains an attractive target for big global brands, observing the company’s 20% return on equity is in line with global peers, but the company is trading at a discount to said peers.
Otherwise, Ord Minnett appreciates the defensive exposures to health and industrials, and expects these are likely to kick off strongly in FY24.
Brokers Lay Their Bets
While disappointed that no extra value was to be realised from the strategic review, brokers received the news fairly well, retaining ratings but cutting the target price by an average 26% to $3.93 from $4.65, according to FNArena’s consensus price target.
Morgans lowered its earnings estimates to the lower end of guidance, citing an increasingly challenging operating conditions.
However, the broker believes the company still screens well and retains an Add rating. Morgan’s target price falls to $4.00 from $4.90.
Wilsons casts a cautious eye to slowing nurse immigration but believes overall, the immigration picture is positive given impending reforms.
The broker removes the discounted cash flow component of its valuation, causing the target price to fall to $3.53 from $4.77. Overweight rating retained.
Petra Capital observes the major bottleneck for PeopleIN is a shortage of labour, which is not a bad place to be in.
The broker retains a Buy rating and its target price falls to $4.90 from $5.20.
Ord Minnett notes internet advertisements continue to track above long-term averages and retains a Buy rating. The broker cuts its target price to $3.86 from $4.39.
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