15 October 2014

ASX-listed recruiters continue to decline: 2013/14 in review

The past year or so has been a particularly bloody one for the Australian publicly listed recruitment sector. Last September HJB Limited, after many years of unacceptable financial results, sank into administration. In August this year, Bluestone Limited, after only a handful of years of unacceptable results, went the same way as HJB, owing $86 million to a long list of unsecured creditors (who are not expected to receive a single cent of their money).

As I had highlighted in the past two editions of my annual review of Australia's listed recruitment company stocks, Bluestone executives were unable to reduce operating expenses to match the rapid decline in sales and gross profit and subsequently ran out of cash. Extensive borrowing ($53 million) over the final three years of the company's life had been insufficient to repair the damage caused by acquisitions that did not deliver high margins, gross profit growth or opportunities for company-wide cost-reducing synergies.

Sadly this is a very familiar tale within the publicly-listed recruitment sector; the rush to deliver growth becomes a rush to buy growth. Almost all recruitment companies pay for their purchases with borrowed money as vendors want the cash and their six month round-the-world holiday.

This borrowed money becomes a drag on growth as soon as the acquired company starts delivering sub-par financial results. Unfortunately this delivery of sub-par financial results quickly becomes the norm and the downward spiral commences.

Long term employees sense the barely repressed desperation in the company's leadership as short term outcomes become the focus and all investment in non-critical activities (ie anything with an uncertain or longer term payback period) is axed. The very employees you need to help deliver (or maintain) stability, morale and to service important clients, become the first employees to return the calls of rec-to-recs (who, by the way, know within a month of when the downward spiral has begun) and lead the charge for the exit.

The key coal-face consultants and leaders depart first then the revolving door of CEOs and CFOs begins. These leaders and consultants, after their respective restraint periods are up, open their own agencies in direct competition which turns the trickle of client departures into a flood.

The final nail in the coffin is when the original vendor(s), freed of their two or three year non-compete clause, get back into the recruitment business (as the money has gone faster than they imagined or their other entrepreneurial ventures proved to be not as profitable or interesting as recruitment).

It's all as predictable as night following day.

Anyway, back to my review of the past financial year for Australian ASX-listed recruitment agencies.

To repeat what I wrote this time last year; there is very little good news to report and it is very hard to be optimistic about the future of listed recruitment companies in this country.

Declining revenues and profits across the board were reflected in share price falls and drops in market capitalisation.

Here's a selected summary of results for the period 1 July 2013 to 30 June 2014, unless otherwise stated. The figures in brackets in the Sales column refer to the difference compared to the previous financial year. In the After-tax Net Profit column the figures in brackets are the previous financial year's (2012/13) after-tax net profit results.

Company
Market cap at 10 Oct, 2014 (millions)
Sales (millions)
After-tax Net Profit (millions)
Net debt (millions)
Skilled
$521
$1869 (0%)
$44.2 ($56.2)
$170.1
Chandler Macleod
$210
$1413 (-6.0%)
$13.6 ($11.1)
$70.6
Clarius
$23
$179.4 (-20.3%)
-$1.7 (-$42.2)
$0
Ambition+
$9.4
$95.4 (-8.1%)
$0.1 ($1.3)
$0
Rubicor
$6.6
$198.7 (-16.8%)
-$0.8 (-$4.8)~
$10.1
HiTech Group
$1.9
$8.0 (+9.5%)
-$200k (+$200k)
$0

PMS*
$311
$1435 (-5.5%)
$30.5 ($32.1)
$0
SMS^
$267
$314.4 (+13%)
$12.7 ($21.1)
$0

* PMS results are for the full year ended 31 March 2014
+ Ambition results are the full year ended 31 December 2013
^ SMS's recruitment division is M&T Resources
~ both of Rubicor's net profit results show profit before tax and unusual items to take out the impact of the debt forgiveness negotiated in 2013.

Note: SMS or Programmed (PMS) aren't recruitment companies as their respective recruitment brands, M&T Resources and Integrated each make up less than one third of their parent companies' revenues.

Here's a summary of CEO remuneration as well as comparative share price data:

Company
CEO/MD
2013/2014
Total cash   compensation ($000's)
Share price at close 10/10/2014
Share price 12 months ago
Skilled
Mick McMahon
$1487.6 base
$615.3 other
$2102.9 total
2.20
3.51
Chandler Macleod
Cameron Judson
$638.6  base
$293.6 other
$932.2 total
0.38
0.45
Clarius
Kym Quick
(resigned May 2014)
$500.0  base
$254.8 other
$754.8 total
0.26
.28
Ambition
Guy Day  (resigned Jan 2014)
$425.0  base
$15.6 other
$440.6 total
0.14
0.18
Rubicor
Kevin Levine
$372.9  base
$29.7 other
$402.6 total
0.06
0.04
HiTech Group
 Ray Hazouri
$320.1  base
$25.8 other
$345.9 total
0.06
0.10

Programmed Maintenance Services
Nicolas Fairbank (CEO of Workforce division)
$329.3 base
$71.7 base
$401.0 total
2.65
2.75
SMS
Chris Sandham (CEO of M&T Resources)
$225.3  base
$189.3 other
$414.3 total
3.82
4.39

A brief commentary on each company's results:

Skilled Group (SKE:ASX)
For each of the past four years, under CEO Mick McMahon, Skilled has recorded sales of between $1.8 and $1.9 billion.

McMahon's achievement of progressively increasing operating profit in his first three years ($47m to $68 to $75m), due to deep cuts in operating expenses ($159m to $122m to $96m) in the face of rapidly declining margins, was undercut this year when operating expenses not only increased (by $17m) but increased by $5 million more than gross profit ($12m).

The ultimate outcome was a net profit decline of $12 million and net debt blowing out from just over $44 million last year to around $170 million this year. This additional debt was primarily used for acquisitions ($86.5m) and capital expenditure on additional vessel acquisitions ($40.9m) for its recent purchase Broadswood Marine Contractors.

The Workforce Services (ie their blue collar recruitment arm) and the Technical Professionals (ie their engineering & technical recruitment division) divisions of the company both went backwards on every key financial measure. WS accounts for 48% of total company revenue and only 32% of operating profit and TP accounts for 20% of revenue and only 15% of sales, demonstrating how difficult it has been for Skilled to reverse declining margins in both divisions.

McMahon has signaled his intention to depart Skilled sometime in 2015 and it's not hard to see why; he's done a very good job in a very tough section of the recruitment market and I suspect he thinks that times are only going to get tougher and Skilled needs a fresh set of eyes.

Skilled's market capitalisation had fallen 37% compared to this time last year, indicating the market's rather gloomy view of Skilled's prospects of profitable growth in the near term.

Chandler Macleod (CMG:ASX)
We are now four years down the track from Chandler Macleod's acquisition of fellow ASX-listed Ross Human Directions (RHD) and since then Chandler McLeod has made other significant acquisitions such as Trilogy Resources and Vivir Healthcare.

Here's a simple four year comparison:


2009/10
(pre RHD acquisition)
2013/14
(post Julia Ross acquisition)
Total revenue
$818 million
$1413 million
Gross profit
$47.2 m
$75.4 m
Operating Profit
$16.9 m
$27.4 m
Net Profit
$13.7 m
$13.6 m

Over the past four years, Chandler Macleod have racked up a combined total of $49.3 million in debt interest together with merger & restructuring charges.

To put that $49.3 million into context, about thirty perm placements per week have been required just to cover these costs ($237,000 per week).

When I wrote my first review of this nature in October 2010, the Chandler Macleod share price was 36 cents and CEO Ian Basser had delivered a net profit of $13.7 million. This year CEO Cameron Judson delivered a net profit of $13.6 million as the share price sat at 38 cents. Revenue has gone up 73% and gross profit has gone up 60%; all for no bottom line benefit.

CMG market capitalisation has increased 40% in that time but if I was a CMG shareholder, I would be wondering whether all the time, money and focus had been better invested in the existing CMG businesses rather than acquisitions. The recent sale of Julia Ross's Sydney harbourside mansion for $37 million ($15 million-plus capital gain in ten years) would suggest she's done rather better things with her money than CMG.

You would want to hope that acquiring the RHD Managed Services business (CMG had no such offering at the time of the RHD acquisition) has been worth it.

Clarius (CND:ASX)
The good news for Clarius is that they appear to have exited a lot of unprofitable business. Although revenue declined 20% in the past year after a 17% fall the year previously, the gross profit result for 2013/14 of $37.1 million was only slightly down on the $37.5 million gross profit of 2012/13.

Unfortunately internal costs crept up which resulted in an operating profit loss of $2 million after a break even result the year before.

Tiny bright spots on the Clarius horizon were the doubling of revenue from Asian operations to $9.2 million and the three Clarius offices in New Zealand increasing revenue 40% from the previous year to $7.8 million.

CEO Kym Quick resigned in May. Her exit has been followed by a string of additional departures from the Clarius leadership ranks.

Clarius's market capitalisation has fallen 60% in the past four years. The yet-to-be-announced new CEO has a massive job ahead of him/her to restore market confidence in the stock.

Ambition (AMB:ASX)
It's hard to conclude that Ambition is anything other than a mess. In the past twelve months co-founder and former Group Managing Director, Paul Lyons, has resigned, then his successor as Group MD, Guy Day, departed two months' later along with the Group CFO, Peter O'Donovan and Board Chairman, Eric Dodd.

Less than a month after these three departures, it was announced that Lyons was back at Ambition in a ‘six month project role' which turned out to include taking charge of the leaderless Ambition Hong Kong office.

Co-founder Nick Waterworth is now Executive Chairman with no Group CEO appointment likely anytime soon as Waterworth aims to return the business to profit with a reduced (cost and capability) management base. Closing the Ambition Perth office and abandoning their foray into HR recruitment have been two cost saving measures enacted earlier this year.

Ambition released a half year trading update in mid-August (Ambition has a calendar year for its financial year) and there was very little to get enthused about. The surging UK recruitment market seems to have passed them by completely as sales for the January to June half year dropped 14% to $5.7 million; a completely disastrous result when you consider that Ambition paid around $30 million to acquire this business (Witan Jardine) at the peak of the pre-GFC market in December 2007. The business has never traded profitably since and former Witan Jardine Managing Director, Andy Winterburgh, post-sale restraint period, has (surprise, surprise) now set up another financial services recruitment agency in London.

Ambition were reasonably successful in the pre-GFC period in a high cost-high margin-high volume niche market. That market is still high cost but is now lower margin and lower volume.

Ambition have failed to adjust their cost structure or business model sufficiently to generate any sort of profit and as a result they are, unfortunately, likely to continue their downward spiral unless Nick Waterworth can produce something just short of a miracle.

Rubicor
New CEO, Kevin Levine has been in the big seat for 18 months now and there are some small signs of light for Rubicor shareholders.

A top line revenue drop of nearly $40 million caused only a $1.5 million decline in gross profit indicating a significant proportion of the lost business was unprofitable. Levine also managed to take $2 million (14%) out of operating expenses. Last year's debt forgiveness caused a reduction in interest costs but still high enough to turn a small operating profit ($800k) into an EBIT loss (-$900k).

This is all relatively good news, but this doesn't hide the fact that Rubicor's gross profit is 54% less than it was three years ago and is still heading in the wrong direction.

Levine still has a massive amount of work ahead of him to make Rubicor consistently profitable.

HiTech Group (HIT: ASX)
Sales are 8% lower ($8.7m to $8 m) than they were four years ago and gross profit is 45% lower ($2.2m to $1.2m) indicating that higher margin work is being replaced with lower margin work at a rapid rate.

The CEO, CFO and CIO all share the same last name.

I'm sure there's a very good reason that HiTech is a publicly listed company but it's not obvious to me.

Programmed Maintenance Services (Integrated Workforce)
Programmed's recruitment division, Integrated Workforce, had its first full year under new CEO, Nicolas Fairbank, who replaced long-time CEO, Brian Styles who left in early 2013.

Integrated recorded an 8% decline in revenue to $372 million with operating profit only dropping 2% to $1.5 million.

Last year Programmed purchased a 27.5% stake in new online recruitment marketplace OneShift and this year reported a $700k contribution to the full year losses of OneShift, indicating an overall loss of around $2.5 million (Programmed paid $5 million for their stake) for OneShift's most recent financial year.

I doubt programmed CEO, Chris Sutherland, will tolerate that sort of loss again this year. Watch this space.

SMS Management and Technology (M&T Resources)
After a poor 2012/13 result (12% revenue fall and 37% operating profit decline), M&T Resources made up all of last year's revenue decline, and then some, with a 20% top line improvement to $76.9 million, although operating profit didn't make the same improvement and at $3.6 million was still $700k below the result of two years ago. Contractor numbers averaged 435 for the year, substantially up on the 320 recorded the year before.

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1 comment:

  1. I always look forward to this annual post on the publicly listed Aussie firms and this is another top effort, thanks Ross

    ReplyDelete