Nottingham-based Staffline (STAF:AIM) is one of the biggest recruiters in the UK, supplying over 60,000 contract staff a day to more than 1,500 customers, yet it is probably one of the least well-known to investors.

The company is the leading outsourced provider of blue-collar workers to the private sector and the Government, although it tries to avoid the tag of outsourcer given the negative connotations and low earnings multiples that UK outsourcing stocks attract.

Its recruitment arm, which accounts for 90% of revenue and 60% of pre-tax profit, is focused on food production and distribution, logistics and online retail.

Staffline claims to account for 10% of the blue-collar UK recruitment market.

Its size and its embedded relationships mean its business should theoretically be resilient in economic downturns as well as providing growth during expansions.

BUSINESS MODEL SUITED TO THE CHANGING ECONOMY

Staffline operates a very asset-light model with managers working from their customers’ premises for the most part, connected to Staffline’s systems via a laptop.

It also operates from a small number of regional recruitment hubs using social media and the internet to attract candidates rather than having a nationwide network of offices.

Most of the staff it contracts out work in food production and distribution, including supermarkets. However as consumers switch to buying more goods online it is winning a growing share of business from delivery firms such as DHL, Hermes and Parcelforce, and retailers such as Argos, ASOS (ASC:AIM) and Ocado (OCDO).

The majority of people who find jobs via Staffline secure permanent contracts, with a fifth on temporary contracts to cater for companies needing to increase or decrease head-count at short notice.

INCREASING ITS ‘TRUSTED SUPPLIER’ ROLE

In order to make its customers ‘stickier’ the company introduced a digital engagement platform last year to allow companies and workers to share their experiences.

The platform has been a huge success, improving both employer insight and worker productivity and retention, boosting Staffline’s reputation as a trusted supplier.

As well as leading to increased business from existing customers, word has spread to non-customers with one firm trialling the system across its 35,000-strong workforce meaning potentially another big win.

LEADING POSITION IN SKILLS AND TRAINING

As well as being the leading provider of flexible workers, Staffline is the leading adult skills and training provider in the UK.

Its PeoplePlus business, which accounts for 10% of turnover and 40% of pre-tax profit, has been transformed from a contractor to the Government’s Work Programme into an education and training provider.

With the Work Programme ending next March the transformation of PeoplePlus is almost complete with non-Work Programme revenue up 28% in the first half of the year.

The total apprenticeship market is seen growing to £3bn by 2022 and the Chancellor’s decision in the latest Budget to halve the contribution from small businesses to the levy is seen as a positive.

After the acquisition of LearnDirect Apprenticeships in July, PeoplePlus is now the market leader in apprenticeships both levy-funded and non-levy with a 10% market share in the latter and blue-chip clients such as Lloyds Bank (LLOY), Marks & Spencer (MKS) and J Sainsbury (SBRY).

Its leadership position has been bolstered by the failure of its nearest rival 3aaa, which has been investigated twice by the Government and is currently barred from taking on new learners.

Staffline also runs training programmes in 10% of the country’s prisons helping to teach prisoners valuable skills such as plumbing and car mechanics to help them find subsequent employment.

Getting a job is a key step to offenders being able to find accommodation which in turn reduces the risk of their re-offending.

AGGRESSIVE NEW 5-YEAR EARNINGS TARGET

While apprenticeship and adult learning revenues build, revenues from the Work Programme continue to wind down creating a short-term drag on Staffline’s accounts.

To counter this situation the company is making strategic acquisitions with the hope that earnings per share will hit a new target of 200p in 2022.

To put this target in perspective the current consensus forecast for 2020 earnings is just 107p, i.e. below last year’s level, so the new target is ambitious.

The blue-collar recruitment market and the skills training market are still quite fragmented with the potential to buy assets at four times operating profit.

Therefore the company is investing its cash flow and taking on debt to acquire assets. While debt has doubled since the end of 2017, the net debt position (debt minus cash) is still less than 1x last year’s operating profit.

With more companies needing to contract staff on a long- and short-term basis and the company adding billings by buying up smaller competitors, one can understand why management are confident about a solid growth trajectory for Staffline.

The £336m business has raised its dividend every year for the past decade and profits are forecast by analysts to keep growing for the foreseeable future.

That’s encouraging although there are several negative issues to consider as well.

For example, investors should watch to see how Brexit affects the pool of workers happy to do lower-paid jobs. Historically Staffline has been very reliant on Eastern Europeans living in the UK to do such work.

It is also worth noting that earnings forecasts have been downgraded several times over the past 12 months. (IC)

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