Shares in Staffline Group (LSE: STAF) shot up by 18% when markets opened this morning, after the staffing firm announced a 34.5m deal to acquire A4e Limited, a training provider that operates a number of large welfare to work programmes for the government.
The deal means that Staffline will become the largest provider, by geographical coverage, of Work Programme schemes.
The firm hopes that these large, government-funded contracts will help drive long-term growth, but how does the newly-enlarged Staffline compare to its larger peer Hays (LSE: HAS), which offers similar growth potential and more diversity?
The A4e deal in detail
Stafflines payment of 34.5m equates to 2.5 times A4es earnings before interest, tax, depreciation and amortisation last year, which seems fairly reasonable to me.
The purchase will be funded by new debt facilities, substantially increasing Stafflines net debt.
However, A4e is expected to report pre-tax profits of 10.2m for last year. Given that Stafflines adjusted pre-tax profits were only 18m last year, the acquisition of A4e could transform the firms bottom line and enable the firm to reduce its debt levels again quite quickly.
Staffline vs. Hays
Stafflines management estimate that the acquisition of A4e will increase underlying earnings per share by 26% for the current year.
In contrast, Hays earnings per share without acquisitions are expected to rise by around 19% this year.
Using the numbers in todays press release and last years figures, heres how the A4e deal could affect Stafflines 2015 figures and how the smaller firm compares to Hays:
|
2015 forecast |
Staffline pre-A4e |
Staffline plus A4e |
Hays |
|
Revenue |
565.9 |
706m |
3,866m |
|
Adj. earnings per share |
69.3p |
87p |
7.4p |
|
P/E |
11.6 |
10.9 |
20.9 |
|
Yield |
1.9% |
1.6% |
1.9% |
I reckon Staffline shares still look attractively priced after todays deal news, despite their 18% rise. Ive assumed that this years dividend remain at current forecast levels, as Stafflines increased debt load could mean less free cash for shareholder returns.
Stafflines operating margin has fallen from 3.4% in 2010, to just 2.2% in 2014, but my calculations suggest that todays deal could reverse much of this decline, which could eventually support a higher P/E rating for the shares.
Hays already enjoys a superior 4% operating margin, but with a 2015 forecast P/E of 20, a lot of growth already seems to be reflected in the price.
Overall, I believe Staffline could be a better buy than Hays in todays market although management will need to prove that they can deliver the promised benefits to shareholders, while keeping debt levels under control.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
