7:59 cut – GATC

Gattica (GATC) – Stakebuilding by Morson Group

Gattica is a recruitment company (contract workers and permanent staff) where new management issued an in-line outlook statement in February following a long run of bad performance.

Since then shares have been on an upward trend with some unusual daily jumps apparently related to further purchases by MMGG Acquisitions Limited, the parent company of Morson Group, that first notified a holding in May 2018. Gattica also announced improved H1 results earlier this month.

It seems that Morson started looking for / buying the latest tranche of stock on Monday causing a jump from 148p to 160p, and crossed the 11% threshold yesterday resulting in an announcement this morning.

It is easy to see why Gattica might be a takeover target:

• they previously had growth aspirations themselves but following poor execution have started retrenching to areas where they have scale and profitability
• they have significant debt which makes them superficially less attractive, however this debt is due to timing differences between paying contractors and clients paying invoices, is relatively cheaply funded and insured against bad debt
• they recently stopped paying a dividend which will alienate much of their shareholder base; institutional shareholders have been selling down.
• they are cheap, with a PE ratio of 6.5 (and much lower when stakebuilding started) on forecast earnings that are still affected by legacy issues
• price to book is 1.1 (although of course includes goodwill)
• although a crude measure, this share was trading well above 400p as recently as July 2016.

There are also lots of negative points around Gattica, most of which centre around them being a people business with a questionable moat.

I hold, may add this morning, and will certainly be looking to add on any price weakness.