When the go­ing gets tough the staff get go­ing

Finweek English Edition - - Front page - MARC HASENFUSS

When the go­ing gets tough the staff get go­ing

HU­MAN CAP­I­TAL is in big de­mand and (if you can for­give a ter­ri­ble pun) re­cruit­ment com­pa­nies are about to make a (s)killing. In­deed, staffing – or hu­man re­sourc­ing, its more pre­ten­tious ti­tle – is back in fash­ion again with in­vestors on the JSE as strong fun­da­men­tals and a slew of cor­po­rate ac­tiv­ity reignit­ing se­ri­ous in­vestor in­ter­est.

Tra­di­tion­ally, spe­cial­ist ser­vices busi­nesses are of­ten looked at askew by in­vestors, who (per­haps rightly) reckon out­side the Bid­vest Group (and the old Reb­serve rump now in Mve­laphanda Group) there’s not much that reg­u­larly presents strong re­turns.

But SA’s re­cruit­ment sec­tor has started to pick up some im­pres­sive mo­men­tum – tak­ing its cue not only from our cur­rently vi­brant econ­omy but also from an acute skills short­age that’s seen strong de­mand for staff through­out the fi­nan­cial ser­vices, re­tail, en­gi­neer­ing, min­ing, con­struc­tion, telecom­mu­ni­ca­tions and pub­lic sec­tors.

Nat­u­rally, the de­mand for af­fir­ma­tive ac­tion can­di­dates is also a ma­jor fac­tor un­der­pin­ning the bub­bling busi­ness lev­els in the re­cruit­ment in­dus­try. Mar­ket leader Adcorp noted in its most re­cent set of re­sults that the bal­ance in the re­cruit­ment mar­ket has “shifted some­what away from a con­straint in new em­ploy­ment po­si­tions to a con­straint in can­di­date avail­abil­ity”. That’s a fine po­si­tion for re­cruit­ment busi­nesses to find them­selves in...

His­tor­i­cally, staffing ser­vices have never – like other spe­cial­ist sec­tors, such as tech­nol­ogy or health­care – re­ally caught in­vestors’ fancy for sus­tain­able pe­ri­ods. One thinks of list­ings such as PAG and Tech­ni­hire, which lan­guished for much of their ten­ure on the JSE.

Staffing did come into vogue briefly in the heady days of the late Nineties list­ings boom, when a num­ber of con­tenders looked ready to cash in on in­creased de­mand for hu­man cap­i­tal. But not ev­ery­one got the busi­ness model right, though ac­quis­i­tive

Adcorp emerged as the clear mar­ket leader and mar­ket favourite, earn­ing a tag as a high growth “grey” stock.

Right now staffing is hot­ting up as an item on the JSE, un­der­lined by the fact that the mar­ket has seen three new list­ings (ex­clud­ing spe­cial­ist call cen­tre op­er­a­tor Di­a­logue). Around R600m has also been spent on ac­qui­si­tions by the main play­ers over the past few months – while the share price of mar­ket leader Adcorp has more than dou­bled in two years.

In­dus­try sources say that fur­ther list­ings on the JSE can’t be ruled out but that there’s re­ally only one ma­jor un­listed player re­main­ing, in the form of Trans­man. As­sem­bling a list­ing patched to­gether with an ar­ray of smaller re­cruit­ment agen­cies would prob­a­bly not be warmly wel­comed by the mar­ket, which has learnt to be wary of com­pa­nies as­sem­bled specif­i­cally for list­ing.

For a sec­tor that’s largely been in a “wait and hope” phase for the past four years, the ac­qui­si­tions and new list­ings ac­tiv­ity sug­gest strongly that the staffing sec­tor could be on the cusp of a longer-term growth phase.

Adcorp CEO Richard Pike con­firms that SA’s staffing sec­tor is see­ing new lev­els of buoy­ancy. “There’s a ma­jor skills short­age in SA and if you can place staff, you can make money.” Pike says de­mand brought on by the skills short­age is com­pounded by SA’s rapid eco­nomic growth and in­creased in­vest­ment in ex­pen­di­ture.

Nat­u­rally, with in­dus­try prospects look­ing fun­da­men­tally strong, the re­cent spate of cor­po­rate ac­tiv­ity – of which Adcorp ac­counts for the bulk in value terms – is un­der­stand­able. Play­ers are jock­ey­ing for vi­able niches or to broaden their range of place­ment of­fer­ings.

Pike’s com­ments are echoed by Prime­serv MD Mer­rick Abel, who com­ments: “There’s no doubt the mar­ket is buoy­ant. There’s a se­ri­ous lack of skills – so it’s a case of be­ing able to of­fer your avail­able skills to or­gan­i­sa­tions.”

Re­fer­ring to the flurry of cor­po­rate ac­tiv­ity, Abel says the largely frag­mented mar­ket is hot­ting up quickly, and ac­quis­i­tive par­ties would need to take care not to over­pay for as­sets.

Of course, the risk in any ex­u­ber­ant sec­tor is that the scram­ble for as­sets can in­crease the risk of over­pay­ing in trans­ac­tions, bloat­ing cen­tral costs and strain­ing the core man­age­ment func­tion to the point where fo­cus (and some­times strat­egy) be­comes mud­dled.

Surely no­body needs re­mind­ing that such a growth phase could see an op­por­tu­nity for oth­ers to list, the dan­ger be­ing that copy­cat com­pa­nies that are patched to­gether may come to the mar­ket. Of­ten the cen­tre sim­ply doesn’t hold...

Abel says though there are many smallto medium-sized staffing en­ter­prises in SA, only a few group­ings are of the R500m+ size.

Pike sug­gests the flurry of deals in the staffing sec­tor is more a func­tion of nat­u­ral con­sol­i­da­tion than an ag­gres­sive as­set grab. He points out that SA’s staffing sec­tor is very frag­mented – com­pris­ing 3 000 mainly small play­ers. “The cor­po­rate ac­tion we’ve seen is rel­a­tively small mea­sured against the en­tire sec­tor. There could well be more ac­qui­si­tions this year...”

Apart from the im­prov­ing sen­ti­ment for staffing ser­vices coun­ters, in­vestors may also find the “re­ces­sion re­sis­tant” tag rather at­trac­tive. Gen­er­ally speak­ing, staffing com­pa­nies have a built-in ad­van­tage should eco­nomic ac­tiv­ity slow markedly, as cor­po­ra­tions are of­ten con­vinced that re­plac­ing re­trenched em­ploy­ees with “temps” is more cost-ef­fec­tive than re­hir­ing per­ma­nent staff.

While there’s cur­rently a wider range of choice for po­ten­tial in­vestors in this in­creas­ingly vi­brant sec­tor, Fin­week reck­ons any for­ays should be care­fully con­sid­ered. There are ba­si­cally half a dozen op­tions avail­able on the JSE, each of­fer­ing in­vestors a spread of es­tab­lished and fledg­ling op­tions.

In­vestors who be­lieve firmly in sus­tained eco­nomic growth for the medium term (ie, all the way up to the 2010 Soc­cer World Cup) should con­sider some staffing ex­po­sure in their port­fo­lios. Our thoughts and rat­ings on the listed staffing con­tenders ap­pear be­low.

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