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02 Jun 2005

Empresaria - Full-year results

25/04/05 Empresaria* - Full-year results

Empresaria announced maiden results as an AiM quoted company showing turnover of £45.4m up 55% and adjusted PBT of £1.5m up 25% gross profit was up 24% at £13.1m and the gross margin was 28.9% from 36.1% reflecting a higher proportion of temporary and contract wor5k, in line with stated company objectives. Profits were stated after an internal investment of £0.5m. Adjusted EPS was 4.2p – an increase of 8%. The group has started 2005 well with only financial services experiencing a slow start to the year in comparison with a strong Q1 2004 performance

Empresaria

Empresaria’s maiden profit before tax, goodwill amortization and discontinued activities was reported at £1.47m against our expectation of £1.4m. Likewise, fully diluted earnings per share adjusted for goodwill, exceptional items and minority charges, came in at 4.2p against our forecast of 4p after a higher than expected tax charge

Gross margins fell from 36% to 29% reflecting the group’s aim of growing primarily through its temp and contract businesses rather than the higher margin but more volatile permanent recruitment revenues. In 2004 the temp/perm split at the net fee income level was 51%/49% against 45%/55% in 2003.

We would make the point that as good as these results are, they were struck after the group absorbed some £0.5m of internal investment costs relating to new start-up operations, branch openings and additional personnel, which for the most part, will not contribute positively to earnings until the current year to December 2005.

Good progress was seen across all divisions although sales within the Supply Chain division fell by 6% to £6.9m due to a particularly flat period during the second and third quarter’s trading. This business always tends to be busiest towards the end of the year and this was particularly marked in 2004. 2004 was also a year of significant investment with over £200,000 spent on new branch openings (now numbering seven) and a certain amou8nt of restructuring. We expect these investments to pay off during 2005.

The group did much better in Financial Services after two years of market weakness. Turnover rose by 19% to £3.7m helped by increased activity levels in senior level search and selection in the Insurance and Investment Banking markets. We anticipate further growth in 2005, but in line with other players in this field, the rate of growth seen in the first half of 2004, particularly in banking, is not expected to be a strong as 2003.

The Construction, Property Services and Engineering division grew strongly with turnover of £25m (£10.4m) although mainly as a result of two acquisitions, FastTrack and Reflex. These companies, acquired in September and August 2004 respectively, traded well and, given the buoyant market conditions, should produce further strong growth in 2005.

The Public Sector division is focused on the supply of qualified social workers and allied health professionals and in the past year grew turnover by 31% to £6.7m. The latter business, Healthcare First, showed good growth in the year even though some larger competitors found the going more difficult. However, it is still of a size and flexibility to be able to buck market trends and the board believes that further progress can be made in the current year. Social Work Associates made good progress and opened a new office in the Midlands

Finally, Specialist brands increased turnover from £2.9m to £3.1m. This division is predominantly focused on the provision of permanent staff in specialist niche markets and both Greycoat Placements (domestic recruitment) and McCall Associates (recruitment-to-recruitment services) showed good growth.

There were two start-ups during 2004, Skillhouse Staffing, an IT staffing company based in Japan and 2nd City Resourcing, providing contract and permanent marketing and PR professionals. The former only commenced trading in early December and has made a good start to 2005. Empresaria may decide to buy out Tony Martin’s share of the UK holding company at a price expected to be slightly higher than his original investment. Gerard Stewart Inc is a new start-up based in Atlanta, Georgia and here the group hopes to build on the skills and contacts of its new local head of operations within the recruitment-to-recruitment market. This business will also be extremely useful in terms of providing the group with market information leads for new business.

Net debt balances at the year-end were virtually unchanged at £1.6m against £1.3m in a year earlier and are stated after £2.2m cash raised by the issue of shares and £2.2m spent on acquisitions.

Our forecasts for the year to December 2005 are unchanged against our recent upgrade to numbers in February 2005. We are anticipating adjusted pre tax profits of £2.2m and earnings per share of 5.5p suggesting a rise in EPS of 31%, albeit partly by a lower tax rate. Increasingly, we see the group’s ambitions moving overseas with the setting up of modest and discreet niche businesses that are able to grow, but where the operational risk is minimized. This will be achieved by the implementation of the group’s well-tested business model which imparts a great deal of operational responsibility onto the subsidiary management who of course have a substantial interest in the equity of their own business. Incentives are therefore linked directly to the performance of each group company.

At 72p the shares are modestly rated on a 2005 PE of 12.8x and an EV/EBITA of just 6.7x. We remain with an Outperform recommendation and believe the shares are capable of appreciating significantly through 2005. In this respect we have a 12-month price target of 90p (Published 03/05/05)