BUY, HOLD, SELL
Companies involved in staffing solutions have been shunned by the market. Some are dirt cheap — but produce clean profits
Share price: 63c JSE code: PMV
PRIMESERV HAS BEEN consistently profitable for the past six years — and shareholders have been treated to steadily increasing dividends for the past five.
The market couldn’t care less, and the group’s shares trade on a lowly trailing earnings multiple of 2.4. This suggests the market is questioning the sustainability of the business model.
But in the year to end-June Primeserv was anything but sputtering, with the top line up 11% R807m. Operating profit jumped 14% to R25m, which implies that Primeserv management runs a tight ship. The group’s balance sheet has also been reinforced. The cash flow statement did look vulnerable at year end — but directors indicated that outstanding sums on project work had been collected after the financial year end.
On paper, Primeserv looks a screaming buy. But in truth the share price probably won’t shift markedly; investor sentiment for companies involved in staffing solutions and training are still jaundiced. However, IM thinks Primeserv must be a candidate for a buyout and delisting. The group is unlikely to raise capital any time soon, and the cost of maintaining a JSE listing seems exorbitant for such a small-cap counter. Last stated NAV was 167c a share. Even if Primeserv just delivers half its 2019 earnings for the next five years, it would more than justify paying an attractive premium on the share price. ●
Share price: 160c JSE code: WKF HOLD AS WITH PRIMESERV, THE SOLID profit performance of Workforce has been roundly ignored by the market. Over the past five years, Workforce has posted collective earnings of more than 185c a share (excluding the just-released interim earnings number).
The difference between Primeserv and Workforce is that the latter has only recently resumed dividends (on a high cover) after an acquisition spree. It seems likely that Workforce will prefer to invest its free cash in growth opportunities.
The interim results showed the stresses and strains of the tough local economy, but Workforce managed a respectable bottom line of 18.5c share. Assuming a slightly stronger second half, full-year earnings of 37c-40c a share seems a reasonable forecast, placing the share on a forward earnings multiple of less than four. Workforce also boasts an intrinsic NAV of 166c a share.
While Workforce is dirt cheap, the group’s longer-term plans — which involve separately listing silos when they have been bulked up to achieve certain after-tax profit targets — will keep a cap on dividends. Without strong dividend flows from Workforce’s decent cash flows, there probably isn’t much to interest the market in the short term.
IM rates Workforce as an interesting long-term hold. ●
Share price: 39c JSE code: CSG SELL CSG HOLDINGS — WHICH HAS PSG Group and ARC Capital as significant shareholders — has arguably been the most aggressive in its diversification efforts away from its core staffing business. At its financial year end its staffing segment provided 43% of revenue, with facilities management at 36% and security at 21%.
The diversification effort proved costly, and CSG’s share price collapse, from about 130c a year ago to under 40c, clearly articulates the market’s disappointment at developments. While revenue from security services increased 7% to R458m, the hastily mustered segment chipped in a loss of R15m to CSG’s operating profit line.
The group conceded that the integration and consolidation of security acquisitions in 2018 took longer than expected. Setup costs of a new centralised control room in Pretoria compounded woes, but CSG has reassured that all design, planning and operational issues there were rectified.
Security is increasingly becoming a central consideration for South Africans. But snapping up small security operations comes with challenges.
IM suspects that it might take CSG a while to build a compelling security cluster, and that the share might best be avoided until there is arresting evidence of operational traction. ●