A dependable workhorse

Companies that operate in the “dastardly” (according to some quarters) labour broking sector are tagged with the most desultory market ratings.

Much like countermate Workforce, Primeserv trades on a trailing earnings multiple usually reserved for companies

that are either in a heap of operational trouble or have seen an acquisition strategy go badly awry. Neither applies to Primeserv or Workforce (where I hold a few shares).

Both seem to have latched onto viable niches.

Primeserv has a strong focus on workplace flexibility solutions, which are aligned to government initiatives aimed at enhancing youth employment opportunities, as well as on the development of labour force skills through its training and learnership programmes. These have a strong emphasis on the upskilling of young South Africans.

Primeserv’s latest set of numbers to end-March are rather enviable. Revenue for the year increased 11% to R807m, with gross showing slower growth at 5% to R112m and margins squeezed down from 14.75% to 13.8%.

With operating expenses well contained and the interest bill slashed, Primeserv showed a 23% gain in pretax profits to almost R25m, with earnings coming in 18% higher at almost 26c a share. So what we have is a share trading on an earnings multiple of less than two times for a company that has built a fairly dependable pattern of profit generation.

Wisely, the company has been buying back its own shares, some compensation for the conservative dividend policy. Primeserv paid a 2.5c a share dividend for the past financial year, which was covered 10 times by earnings.

This payout policy might prompt investors to question the quality of Primeserv’s earnings. In the latest financials, there would be some justification for scepticism in that operating profits are not commensurately reflected in the cash flow statement.

In fact, the cash flow from operations of R1.2m would only equate to 1.35c a share.

But Primeserv pointed out that cash flows were affected by some significant project business that was delivered towards the latter part of the financial year. This can be seen in the steep increase in trade receivables and cash outflows.

It said a significant portion of these trade receivables were collected after year-end, resulting in a return to positive cash generation. Cash flow from operations in the 2018 financial year was more than R36m — or roughly 40c a share.

On the balance sheet, gearing went up slightly from 7% to 8%, but interest cover showed a marked improvement from 11 times to 67 times.

Primeserv’s blue-collar staffing unit — which specialises in servicing the logistics, warehousing and distribution market — performed stoutly. The performance of the whitecollar professional draughting & engineering staffing unit was described as pleasing. The smaller training & consulting services segment was restructured, and while revenue decreased 19% to R20m there was a turnaround with a small operating profit recorded compared with the nearly R6m loss last financial year.

Primeserv says it is well positioned to respond to opportunities “as and when they present themselves”.

With a market capitalisation of about R66m, IM thinks Primeserv itself presents an opportunity. The last stated tangible NAV is around 132c a share — representing an astonishing premium over the share price given that Primeserv is an asset-light services company.

IM believes there is very little downside in Primeserv at current levels. Though the upside its muted by the market’s lack of enthusiasm for the human resourcing services niche, there must be scope for corporate action. IM reckons Primeserv and the larger Workforce should be talking with a view to merging operations — not only to build critical mass, unlock synergies and create more operational diversification, but also to build a more fluid shareholder base that might boost share trading as well as market interest.