Diversification pays off at Workforce Holdings

Faced with hostility to its recruitment and staffing activities, from organised labour and government elements, Workforce Holdings has adapted and set about diversifying its activities to incorporate health care, training and financial services in addition to its recruitment operation.

Like all “labour brokers”, it has had to contend with opposition from unions that fear such services pose a threat to jobs. The irony of this selfpreservation agenda followed by organised labour is regrettable in a country with an official unemployment rate higher than 27% (narrowly defined) and a more broadly defined figure of almost 40%, one would expect political and labour bodies to welcome companies that can reduce this appalling employment.

The outcome of the company’s diversification strategy is a growing proportion of profits being generated from its various segments and a reduced reliance on income from staffing and recruitment.

The diversified businesses tend to have higher intrinsic profit margins than recruitment, explaining why profit growth has beaten revenue growth over the past few years, including in the latest financial year to December 2018.

Earnings before interest, taxation, depreciation and amortisation (ebitda) rose 27% to R156.9m on a 7.4% rise in revenue to R3b. Ebitda as a percentage of sales grew from 4.4% in the prior year to 5.12% for the latest reporting period.

This margin expansion was due mainly to high growth in the training cluster, which enjoys a notably higher net operating margin. The training division saw ebitda rise 157%, from R19.4m in 2017 to R49.9m in 2018, although R8.4m of that increase was due to the acquisition of Dyna, purchased with effect from June 2018.

Staffing and recruitment experienced a reduction in ebitda of 6.2%, from R162.4m in 2017 to R152.3m in 2018; health care’s ebitda rose 22%, from R19.6m to R23.9m; and the financial services ebitda rose 11.2%, from R12.8m to R14.2m.

The rest of Africa, where regulatory hurdles appear to be less onerous than in SA, offers an integrated approach to staffing, training and healthcare. Mozambique, for example, offers opportunities for staffing in the oil and gas fields there, with associated training and healthcare requirements.

Closer to home, the electricity crisis is providing opportunity. Workforce has established a presence in the staffing requirements of the solar-energy industry, mainly in the Northern Cape, and offers a fully integrated approach to staffing solutions. While SA’s electricity capacity remains constrained, renewable energy is likely to be a growth industry.

Workforce’s extremely low tax rate of 1.7% is due to the Section 12H learnership allowances and nontaxable income derived from the Employment Tax Incentive (ETI). The ETI is an incentive launched by Sars, the aim being to encourage employers to hire young job seekers. It reduces the cost of hiring young people by reducing the amount of PAYE owed by the employer to Sars without affecting the employees’ wages.

In their analysis of companies with low tax rates, analysts sometimes use the normal statutory rate now 28% but in Workforce’s case, this application would appear to be unfair, considering the very long timeframe associated with ETI. Provided Workforce can continue to access these two initiatives, the tax rate should remain very low. ETI has provisionally been extended for 10 years until February 2029 and the 12H learnership allowances until April 2022.

Workforce’s share price has been a serial underperformer in the almost 13 years it has been listed. Since November 2006, when it listed at 14c, it peaked at R2.45 in late January 2017, but has now fallen back to R1.60. On a price to earnings ratio of 3.4x, the share seems seductively cheap, but it must be remembered that it is very tightly held and thus not easily tradable.

Collectively, just four entities own more than 90% of equity, including CEO Ronny Katz’s company with 27%.

THE DIVERSIFIED BUSINESSES TEND TO HAVE HIGHER INTRINSIC PROFIT MARGINS THAN RECRUITMENT

THE SHARE SEEMS SEDUCTIVELY CHEAP, BUT IT IS VERY TIGHTLY HELD AND THUS NOT EASILY TRADABLE