Gattaca PLC

Gattaca PLC

Gattaca PLC
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Gattaca PLC is a specialist Engineering and Technology (IT & Telecoms) recruitment solutions business. Shares in this business have half to £3 per share from a peak of £6.

 

Preliminary Results

Share Price: £3.03 (down 2%)

Market Capitalisation: £95m.

 

Despite falling operating profit to £12.7m from £15.1m, management says it is in-line with market expectations.

Gattaca’s turnover is a bit misleading because the firm put more empathise on “net fee income” (aka Gross Profit) and states that revenue includes contractor payroll costs.

Financials

Gattaca basic EPS fell to 23.4p from 32.1p, this is close to their 2011 lows of 20p. Some people prefer “underlying” EPS of 35.3p, but it excludes amortisation and acquisition costs which are real costs.

Gattaca’s net debt grew to £40.3m from £25m. Total bank loans and overdraft is approx. £46m. The company debt is covered by their banking facilities with HSBC of £105m, consisting of £75m for working capital and £30m for bank term loans, both committed until October 2020.

 

Gattaca sees greater deterioration

 

Gattaca’s net cash profit fell from £14.5m to £5.26m caused by higher taxes and cash outflows from receivables.

The company used their loans to cover dividend payments, as the net decrease in cash and cash equivalent fell by £8.4m.

 

Divisional Breakdown

Looking through their divisional segment you see strong growth in the US, but overall international net fee income fell by 4%. Their UK Technology division fell by 6%, while their biggest division “UK Engineering” fell by 3%.

Gattaca didn’t see a decline in overall NFI because of its purchase of Resourcing Solutions Limited (RSL), which is large enough (it earns over £7m in NFI) to make up for the decline.

 

 

Gattaca PLC acquisitions

Before it became Gattaca PLC, the company was known as Matchtech Group. It transformed into Gattaca after acquiring Network International for £58m in 2015. The purchase incurred Goodwill totalling £24.8m, while it adds another £24m of assets are intangibles (mostly software).

Network International earns £57m in revenue and make less than £500k in profits. That means the company was paying for sales rather than earnings.

 

Their latest acquisition is the purchase of 70% stake in Resourcing Solutions Limited (RSL) for £6.9m. the remaining 30% subject to a put and call options exercisable from 12-month post-completion for 5.0x trailing EBITA at that time.

 

RSL is expected to generate Net Fee Income (NFI) of £7.5m and underlying EBITA of £2.0m in the 12 months to 31st January 2017.

The maximum total consideration payable is £15.0m.

Interpretation

Expect Gattaca to pay out another £8m by next year.

 

Looking at Resourcing Solutions accounts, you see operating profits of £1.5m after amortisation in 2016.

 

Now, let’s look at their historical performance

 

Historical Performance

Starting with an overall view of their basic fundamentals.

Chart one: Gattaca PLC Operating Margin, PE Ratio and Normalised EPS

Gattaca PLC(GATC) - PE, Operating margin and eps

Looking at Gattaca normalised EPS, it seems to resemble a peak in their business cycle (their previous peak is back in 2008/09). This is strange because Net Fee Income grew from £13m in 2004 to £75m.

You can blame this on falling operating margins to 2.5% in the last six years from the heydays before the financial crisis of 5%.

Two to three years ago, the market was expecting Gattaca to recover and continue their fast recovery as EPS made up some lost ground in EPS causing PER to peak at 16 times’ earnings.

To put their results into perspective, today’s EPS of 23.4 pence is closer to Gattaca trough earnings cycle and not far from the lows of 20 pence set in 2011.

Back then Gattaca’s share price was trading around £2.20 per share with a market value of £52.1m. Also, net borrowing was lower at £16m. Compare this to today, Gattaca’s share price is £3 per share, with a market valuation of £95m and net borrowing of £40m.

Clearly, the bullish market condition played a part in holding the share price higher.

 

Chart two: Gattaca Asset Turnover and Shareholders’ Equity

Gattaca PLC(GATC) - asset turnover and equity

 

The rise in shareholders’ equity is overshadowed by the decline in asset turnover for the past eight years from 6.8 times in 2009 to 3.8 times in 2016.

A declining asset turnover signals a lower quality shareholders’ equity (i.e. intangibles and goodwill).

And speaking of intangible assets, this item has risen from £5m to £55m (measured in original costs).

This is the result of its purchase of Network International in 2015 (details are in the acquisition section).

 

One thing we watch for in the recruitment industry is the company’s wage bill.

The cost per worker has seen a steady decline, but not enough as Gattaca wage bill totals £41.4m as the number of employees grew to 876.

The wage bill component has been rising since last year to 57%, their highest level.

Gattaca wages

This has put pressure on their operating margin as it falls below 2%.

 

 

Final Thoughts

 

Gattaca plc is experiencing a downward cycle, as EPS collapses.

Management has given shareholders some hope that things will pick up in their UK division. But the UK is experiencing peak employment as the unemployment rate is 4.3%, this is a 42-year low. Normally, at these levels, the unemployment tend to stabilise for a time before unemployment starts to rise again.

Those with good observation skills would have notice EPS fell as the unemployment rate rose in the UK. The difference today is UK unemployment rate is low, but Gattaca EPS has fallen.

What happens if UK unemployment starts to rise, will we see Gattaca report negative EPS for the first time in a long time?

Some would think Gattaca’s dividends are at risk of being cut, but they could afford to use their borrowing facilities to support dividend payments for some time.

Summing up the above facts, here is my conclusion on Gattaca share price.

At £3 per share, there is more of a possibility it will decline further.

 

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DISCLAIMER

The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability.  I don’t hold the company’s shares unless stated.