04 October 2011

Pre-GFC acquisitions fail to deliver for ASX listed recruiters: 2010/11 in review

My review of the 2010 results of the ASX-listed recruiters proved popular enough last year for me to invest the significant number of hours required to do the same exercise for this past financial year. 

One thing is very clear from both this year's and last year's results; most of the ASX-listed recruiters paid too much for recruitment agencies acquired in the pre-GFC rush to accelerate sales and profit. 

Listing a company on the ASX brings with it not just a whole new level of scrutiny but high expectations. Shareholders, analysts and fund managers all expect above-average growth in sales and profit. Slow and steady doesn't cut it. 

Acquisitions look enticing. The business cases presented to boards all focus on the potential efficiencies of amalgamating functions and reducing non-fee earning staff. The numbers on paper all stack up. 

The reality is somewhat different when the real value of the company lies in its people, specifically the major fee-earners and the leaders. Lose these key people and the goodwill (ie the difference between the value of the tangible assets and total price paid) disappears faster than snow in spring. 

Of course, hindsight is 20/20 but how the most significant post-GFC purchase of a recruitment company (Chandler Macleod's acquisition of Ross Human Directions) plays out over the next year or two will be fascinating. Will the Chandler Macleod leadership be able to avoid the pot-holes that others have fallen into? If so, CEO Ian Basser will truly be worth his market-leading remuneration package.

Here's a selected summary of these results, with all results being for the period 01 July 2010 to 30 June, 2011 unless otherwise stated. The figure in brackets in the Sales column refers to the difference compared to the previous financial year. In the After-tax Net Profit column the figure in brackets is the previous financial year's (2009/10) after-tax net profit result:

Company
Market cap at 19 Sept, 2011 (millions)
Sales (millions)
After-tax Net Profit (millions)
Net debt (millions)
Skilled
$428
$1876.3 (+10%)
$3.1 ($12.7)
$95.8
PMS*
$238
$1.202.0 (+7%)
$10.4 ($24.9)
$88.0
Talent2
$168
$306.1 (+26%)
$10.2 ($5.8)
$4.2
Chandler Macleod
$144
$1190.8 (-1.7%^)
$12.1 ($20.6^)
$55.6
Humanis
$55
$222.2 (+71%)
-$1.9 (-$3.1)
$25.1
Clarius
$45
$267.2 (+0.04%)
-$10.3 ($3.0)
$0
Ambition
$13
$96.8 (+7.5%)
$1.2 ($0.9)
$0
HJB
$7.2
$55.7 (+14.6%)
$0.4 (-$2.6)
$2.0
Rubicor
$3.3
$291.7 (+4.0%)
-$5.3 (-$8.3)
$92.4

*PMS results are for the full year ended 31 March, 2011

^ Results are compared to the combined 2009/10 results of both Chandler Macleod and Ross Human Directions.

 
Of course there are plenty of other useful pieces of information when you go looking into the financial statements, like total compensation for CEOs.



Here's what the various annual reports told me, along with some share price data: 

Company
CEO
2010/2011 total compensation ($000's)
Share price at close 21/09/2011
Share price 52 week high
Skilled
Mick McMahon
$667.5 base
$365.1 other
$1032.6 total
1.85
2.42
Talent2
John Rawlinson
$509.8 base
$503.5 other
$1013.5 total
1.16
1.75
Programmed Maintenance Services
Brian Styles (CEO of Workforce division)
$306.5 base
$106.6 other
$413.1 total
2.00
2.24
Chandler Macleod
Ian Basser
$603.4 base
$966.6 other
$1570.0 total
0.32
0.60
Humanis
Rabyieh Krayem
Appointed April 2011
0.24
0.45
Clarius
Geoff Moles
$373.4 base
$189.1 other
$562.5 total
0.50
.81
Ambition
Paul Lyons
$386.8 base
$272.6 other
$659.4 total
0.18
0.42
HJB
Robin Jerome
$190.0 base
$306.2 other
$496.2 total
0.01
0.02
Rubicor
Jane Beaumont
$403.7 base
$461.8 other
$865.5 total
0.03
0.06

A brief commentary on each company's results: 

Skilled: The good news for shareholders has been the resurgence in the company's decimated share price. This time last year Skilled shares were trading south of $1.40. New CEO, Mick McMahon (formerly of Wesfarmers) has obviously inspired some confidence after the wreckage left by his predecessor, Greg Hargrave. 

McMahon has reduced Skilled's mountainous debt by one third in twelve months but interest costs still sucked up an eye-watering 65% of operating income. Despite the good work of the past year, Skilled's top line revenue is yet to return to pre-GFC levels. 

Ghosts of decisions made in more bullish times were seen throughout the year as CEO, McMahon tried to clear the decks with a succession of write-downs and one-off's. Skilled brands, Longhill, SKILLD NZ and Extraman accounted for $12.5 million worth of red ink, branch closures and redundancies cost another $1.7 million, $600k went down the gurgler on the discontinued sale process for Swan Contract Personnel and $3 million worth of amortisation was racked up to the candidate database in the under-performing healthcare recruitment business, Origin. 

Far too many of Skilled's divisions and businesses are returning profitless growth or no growth at all. McMahon's job is straightforward; he has to cut more costs and re-start top line growth. Easier said than done in a company appearing to lack a clear strategy for the Skilled brand. 

Talent2: Although the shine had come off the T2 share price in recent months, investors scrambled to get back on board after Andrew Banks announced impressive results for the past financial year. A 26% rise in revenue and near-doubling of after-tax profit saw T2 shares soar more than 20% within 24 hours of the 2010 results being made public. 

Managed services continued to be the star performer with revenue growing 34% to $181.1 million, returning an EBIT of $22 million, a big jump on the 2009/10 EBITDA of $12.6 million. 

In the 2006/07 financial year, Managed Services accounted for 39% of T2's revenue and 36% of the EBITDA. This year Managed Services' share of total T2 revenue was 59% and its share of group EBITDA was 73%. 

Talent2 continue to be unsurpassed in the ASX-listed recruitment sector in converting top line revenue increases into bottom line profits. In the past 12 months T2 has reduced the percentage of sales devoted to selling, general and administrative costs from 52.3% to 50.7%. 

Programmed Maintenance Services: PMS's workforce division accounts for only 25% of the total PMS annual sales so it's clear PMS does plenty else besides recruitment. Workforce division CEO, Brian Styles continues to deliver solid results with Revenue for the workforce division up 8.4% to $397.5 million and the EBITA result of $11.1 million, represented a 38% improvement on the previous year. 

Unfortunately as a total business, PMS could not convert a small increase in top line revenue into a better net profit result. Operating income slumped from $53 million to $39 million due to gross profit stagnating (1% decline from 2009/10) and operating expenses rising 36%. 

Like Skilled, the interest costs of bullish pre-GFC acquisitions have continued to drag the PMS results down, despite Group CEO, Chris Sutherland's success in reducing long term debt by 38% and financing costs by 25% in the past year. 

Chandler Macleod: Chandler Macleod have spent this past year digesting the acquisition of fellow ASX-listed recruiter, Ross Human Directions (Julia Ross). The benefits at this early stage don't appear to be flowing through to results, or the share price. 

The past year saw both revenue and profit results go backwards when comparing the aggregate FY results of the two separate entities for 2009/10. The share price is 10% below where it was this time last year although a mid-April peak of 60 cents indicated investor confidence was returning before the bears took over the general market. 

CEO, Ian Baser continues, by far, to be the listed recruitment sector's most well-compensated CEO, but he's going to earn every cent with the big challenge he has this year which is to prove the RHD acquisition was worth it. At this stage the 43% increase in operating income for the combined entity (compared to the CM stand alone results the year before) dropped down to a worse bottom line after-tax net profit result ($12.1 million for combined entity in 2010/11 compared to $13.7 million in 2009/10 for CM stand alone). 

At the release of the CM 2010/11 results, Basser was quoted by ShortList as saying, ‘The acquisition of RHD during this year has been very successful'. I would argue the jury is still out on that and this current financial year's results will be a much better indication of whether shareholders will share their CEO's upbeat assessment. 

Humanis: Ex-IPA CEO, Rabieh Krayem has not yet been in the big chair at Humanis for 6 months but already it's clear he has plenty to do. 

Humanis continue to acquire a range of smaller recruitment companies (eg Resco, Westaff) and in the process have managed to grow their revenue from $51.2 million in 2008/09 to $222.2 million this past financial year. The problem being that they have yet to stem the flow of red ink. A loss two years ago of $11.6 million is now down to a 2010/11 loss of $1.9 million. 

In Humanis' life as a public company they have yet to have a year when gross profit has exceeded operating expenses. That situation has to be fixed this year and I'm pretty sure that's what the board would have told their new CEO. 

Clarius: The good news is that Clarius grew their gross profit, operating income and operating profit. The bad news is that top line sales are becalmed and goodwill write-downs cost nearly $15 million. This brings to $24.7 million the value of goodwill write-downs from the pre-GFC bull market purchases of Lloyd Morgan, Alliance, Candle NZ and JAV IT. A well-structured and rigourous new group-wide induction and consultant skill development program (Advance) appears to already be paying off in reduced staff turnover and higher consultant productivity. 

Ambition: The best thing that can be said about Ambition is that they are still here and they didn't have any goodwill write-downs during the past 12 months (after $28.9 million's worth across 2008 and 2009). The improved performance in the Australian operations helped overcome continued stagnation in the UK results, due to Ambition's strong reliance on the UK banking and finance sector. Their Asian results are going backwards and Ambition shares are currently trading at a 52 week low. It's hard to see any blue sky in sight. 

Rubicor: Although this past year was another year of bottom line red ink, there's a strong argument to be had that CEO Jane Beaumont has done a mighty job in the past 12 months with the things she has control of. Sales and gross profit were both up 4% and operating income rose from $2.3 million to $7.3 million. 

The dead weight was the $7.1 million of debt financing costs. This equates to a $28,000 interest bill every single working day of the year. It's a bit depressing to think that you have to make 2 to 3 placements every day just to pay the interest on your debt. 

HJB: The good news is that for the first time in four years HJB managed to deliver black ink for both operating profit and after-tax profit. After a truly horrible past three years (a three year sales decline of 29%, huge staff turnover, unfair dismissal claims and many changes in senior management) it appears that there might be brighter news ahead but it's hard to see what positives there are in HJB's parent company (Charterhouse) keeping HJB as a listed company. A share price of 1 cent is just humiliating. 

Related Article:
ASX reporting season: Black ink slowly returns for recruiters

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