07 October 2015

ASX-listed recruiters are now endangered: 2014/15 in review

When I wrote my first review of the ASX-listed recruitment agencies five years ago, there were nine companies I reviewed. One of those companies was generating a minority of its sales and profit via recruitment agency activities (Programmed). I overlooked H-Tech Group in that first review and I also did not include SMS, who have a minority recruitment agency business (M&T Resources).

As I write my 2014/15 review, the list has become a lot shorter. Since 2009/2010 the sector has witnessed the following departures:

Company
Delisted
Reason
Skilled
2015
Purchased by Programmed Ltd (ASX) and delisted
Chandler Macleod
2015
Purchased by Recruit Holdings (Japan) and delisted
Bluestone
2014
Administration
HJB
2013
Administration
Talent2
2012
Purchased by Morgan & Banks Investments and Allegis (USA) and delisted
Ross Human Directions
2011
Merged with Chandler Macleod (Aus)
Peoplebank
2009
Purchased by private equity (Malaysia) and delisted

Last week saw the last day of trading for Skilled Group as a separate company. Skilled is now owned by Programmed and the new company will commence trading in mid to late October.

We now have five recruitment agencies listed on the ASX. Four of these five companies have a current market capitalisation of $20 million or less. When I wrote my original review five years ago, there were seven ASX-listed recruitment agencies that had a market capitalisation above $20 million; in fact four were capitalised at over $140 million.

The four small companies, of the five left, only remain because they haven't gone broke and/or have no perceived value to a larger buyer. The only way each of these four will be able to increase their value is through organic growth. Given the history of our industry's massive write-downs, you couldn't imagine any bank would extend a loan of any substantial value to any of these four companies.

As our industry is now well into the mature stage of its lifecycle, it is unlikely that the listed recruitment agency sector is going to grow again.

Here's a selected summary of results for the period 1 July 2014 to 30 June 2015 (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 (2013/14) after-tax net profit results.

Company
Market cap at 2 Oct, 2015 (millions)
Sales (millions)
After-tax Net Profit (millions)
Net debt (millions)
Skilled
$378
$2046 (+9.4%)
-$16.7 ($44.2)
$146.1
Clarius
$20.1
$179.0 (-0.2%)
-$11.3 (-$1.7)
$0
Ambition+
$11.1
$99.5 (+8.0%)
-$0.2 (-$1.4)
$0
Rubicor
$6.2
$204.3 (+3.2%)
-$1.3 (-$0.8)
$13.4
HiTech Group
$12.7
$15.1 (+88%)
+$807k (-$150k)
$0

PMS*
$307
$1434 (0%)
$25.7 ($30.4)
$7
SMS^
$359
$356.2 (+13%)
$17.0 ($12.7)
$0
* PMS results are for the full year ended 31 March 2015
+ Ambition results are the full year ended 31 December 2014
^ SMS's recruitment division is M&T Resources

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
Total compensation ($000's)
Share price at close 02/10/2015
Share price 12 months ago
Skilled
Angus McKay
$632.5 total
1.72
2.20
Clarius
Peter Wilson
$337.4  base
$0 other
$337.4 total
0.23
.26
Ambition
Nick Waterworth
$176.7  base
$13.7 other
$190.4 total
0.17
0.14
Rubicor
David Hutchison (appointed June 2015)
$340.0  base
$0 other
$340.0 total
0.05
0.06
HiTech Group
 Ray Hazouri
$264.4  base
$35.9 other
$300.3 total
0.41
0.06

Programmed Maintenance Services
Nicolas Fairbank (CEO of Workforce division)
$339.2 base
$115.1 base
$454.3 total
2.57
2.65
SMS
Chris Sandham (CEO of M&T Resources)
$273.3  base
$165.1 other
$438.4 total
5.36
3.82

A brief commentary on each company's results:

Skilled Group (SKE:ASX)
This time two years ago, Skilled's capitalisation was $828 million and then-CEO Mick McMahon earned over $1.1 million for the 2012/13 financial year.

Skilled capitlisation has more than halved since October 2013, based on Skilled's final closing price. Operating profit increased slightly this year from $66.1 million to $68.1 million. The killer in the bottom line was the $60 million non-cash fair value impairment charge required in relation to the proposed Scheme of Arrangement with Programmed.

The three separate Skilled divisions delivered very different results.

The Workforce Services division (ie their blue collar recruitment arm) and the Technical Professionals division (ie their engineering & technical recruitment arm) both went backwards (again) on every key financial measure. WS dropped 9.6% on sales from the previous year and operating profit  plummeted 35%, flowing on to a dramatic EBITDA margin slump from 4.0% to 2.9%.

The TP division, covering engineering and technical professional staff (brands in this segment include Swan, Mosaic and SKILLED Health), also went substantially backward with sales slumping nearly 17% and operating profit  down nearly 12%. The better news was that EBITDA margin rose from 4.4% to 4.7%.

Engineering & Marine Services (brands include ATIVO, Thomas & Coffey, SKILLED Offshore, OMSA and Broadsword Marine Services) was the star performer with sales up 52% to $941 million and operating profit up 37% to $80 million.

I'll share my thoughts on the merged Programmed/Skilled entity in a separate blog in the near future.

Clarius (CND:ASX)
The past year has seen a massive change at Clarius with a completely new leadership team hired, subsequent to the departure of former CEO, Kym Quick, in mid 2014.

New CEO, Peter Wilson, has been very public about his views on the failings of the previous Clarius leadership team. Already, one of his new leadership team, Barbara Price, is gone after only ten months in her  role as the director responsible for recruitment brands.

Nine months is not a lot of time for Wilson to deliver on promises and 2014/15 full year results indicate that results are much the same as last year. An underlying loss this year of $1.4 million was slightly less than last year's loss of $1.7 million on the back of a small increase in gross profit to $38.3 million.

Clarius exited the Singapore market during the year although revenue from Asian operation increased slightly to $9.4 million. New Zealand operations jumped revenue to $9.6 million a 24% improvement on last year, after a 40% increase the year before.

Of significant concern is Wilson's recent pronouncement about launching new service lines before the end of 2015. l would have thought that focusing on core business (Australian recruitment operations) would be the most important thing for Wilson to focus on right now rather than be distracted by anything new.

The full impact of Wilson's many decisions will be much clearer by this time next year.

Ambition (AMB:ASX)
After the chaos of early 2014, it seems that 2015 has been a much better year so far for Ambition. Co-founder and now Executive Chairman, Nick Waterworth remains in charge on a day-to-day basis and has done a solid job in returning stability and growth to Ambition.

Ambition released a half year trading update at the end of July (Ambition has a calendar year for its financial year) and the signs were encouraging that the rot has been stopped. Total revenue (for the comparable 2014 Jan - June period) was up 12.5% to$48.2 million, with gross profit up 13.1% to $21.7 million and operating profit EBITDA at $1.1 million, up from a $315,000 loss last year. Net profit, after tax, was $525k, a big improvement on last year's $780k loss.

The core Australian business was the main driver of the growth but the small Asian business (comprising offices in Hong Kong, Singapore, Kuala Lumpur and Tokyo), grew revenue 41.9% to $8.7 million, which flowed through to a pre-tax profit $633,000, up from $58,0000 last year.

The UK business, in the face of a record employment growth in the UK, seems moribund. Revenue ($5.5 million) and profit ($34,000) both continued the ongoing decline for Ambition UK.

The best news for Ambition shareholders was in the Waterworth's comment in the 2014 annual report stating, amongst other things:

Inch wide, mile deep:
We are pursuing a strategy of operating in a small number of white-collar disciplines in major business hubs in Australia (Sydney, Melbourne, Brisbane and Parramatta), Asia (Hong Kong, Singapore, Kuala Lumpur and Tokyo) and the UK (London).

This enables us to intimately know the dynamics of each market and develop deep talent pools in our core segments. Our key disciplines are: information technology; accounting/banking/finance; marketing and sales; supply chain; business support; senior executive search and interim management.

Good to great:
2014 was a good year in terms of a turn-around. In working towards great we have committed to investing in and improving all of our current business and during 2015 not entering any new markets. (my bold)

Rubicor (RUB: ASX)
After two years of stability for Rubicor, these past few months have seen massive changes. After a shareholder dispute regarding non-executive director remuneration, CEO, Kevin Levine has been shown the door and ex-McKinsey management consultant David Hutchison has assumed the role of Executive Chairman with a new board, driven by 8% shareholder Cashel Capital Partners Fund 1 Pte Ltd.

In the 2015 Rubicor annual report Hutchison stated:

As part of the review process, we are investigating current revenue sources as well as potential revenue generating opportunities. We are undertaking detailed market analysis of the recruitment industry in order to determine which revenue sources have most potential for Rubicor now and in the future.

The business continues to tender for a number of new contracts, several of which involve multiple Rubicor brands, and we are convinced that Rubicor should focus on ‘moving up the value chain' with its service delivery. At the same time, we need to be aware of the dynamics of the sectors in which we operate and adjust our business model accordingly.

... which is quite a lot of words to say nothing of substance.

Over the past financial year Rubicor's sales improved 3.2% to reach $204 million with a net loss of $4.4 million due to a number of one-off costs. Operating profit dropped slightly from a loss of $1.3 million, down from $1 million last year.

Hutchison, and the new board, have a massive job ahead of them and the issues around remuneration, IT, performance and the overall cost base, that Hutchison alluded to in his report suggests that there are likely to be some challenging times ahead for the various Rubicor leaders.

HiTech Group (HIT: ASX)
Well, who would have thought it?

ICT recruiter HiTech Personnel (listed on the ASX since April 2000) proved to be the star performer of the listed recruitment sector over the past twelve months with a massive rise in both performance and share price.

Sales climbed 88% to $15.1 million, with permanent placement income up 17% and contracting revenue surging 89%. Gross Profit at $3.18 million increased 163% over the prior year. EBITDAS was $1.35 million after a $175,996 net loss the previous year.

The HiTech annual report provides very little to understand how such a quantum leap in improvement has occurred save the following:

We have retained our preferred supplier status with most of our valued clients and are working towards further developing these relationships. Throughout FY2015, we have been successful in being retained as preferred suppliers to additional government departments including the NSW state government. This will provide us with an opportunity to further diversify our revenue base and build on it.

Whatever the Hazouri family have been doing I suggest they keep doing it because it's clearly working!

Programmed Maintenance Services (Integrated Workforce) (PRG: ASX)
Programmed's recruitment division, Integrated Workforce, recorded an 1% improvement in revenue to $377 million with operating profit dropping 29% to $7.5 million as margin pressure in the blue collar sector intensified.

Programmed's 27.5% stake in new online recruitment marketplace OneShift (purchased in 2013) and this year reported a $600k contribution to the full year losses of OneShift, indicating an overall loss of around $2.2 million (after a $2.5 million loss for OneShift's the previous year). Whatever impact OneShift is having it's not a profitable one, yet.

The Programmed/Skilled merger has clearly been a distraction for Programmed's board and executives.

SMS Management and Technology (M&T Resources) (SMX: ASX)
M&T Resources continued last year's improvement with a 11% top line improvement to $8592 million, with a strong flow to operating profit, $5.1 million, up 42% on last year's result. Contractor numbers averaged 469, an 8% improvement on 2014's average of 435.

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