7:59 cut – Staffline (STAF)

A lot has happened since I last wrote about Staffline’s most recent accounting problems at the end of January. The resignation of Chris Pullen announced on 20th February was a critical step towards making the company investable, but it is the slow-motion tsunami of UK coronavirus infections and eventual government response which will be uppermost in investors minds.

Given that their balance sheet is financially geared in the extreme, that they are a forced seller of at least one of their subsidiaries in the worst business environment in living memory and that they operate a staffing agency in an economy where hundreds of thousands of people have been thrown out of productive work, it is hardly surprising that the share price has fallen heavily from 64p to 16.5p in less than two months.

Yet a few days ago I bought in – why?

Firstly, it has long been clear that they are far too strategically important to the functioning of UK economy to be allowed to fail in a disorderly manner. The best way to avoid this is not to let them go into administration, and the best way to do that is forbearance from their banks. Ever since the GFC the UK government has had significant influence with banks. Furthermore they no not appear in danger of exceeding their facility size, just of continued covenant breaking.

Secondly, their business sectors are relatively defensive, including significant amounts in food and they are the go-to people to cover staff sickness.

Thirdly, I believe they are significantly cashflow positive and are trading at a PE of around 1. This valuation reflects a very high level of cheap debt funding which would not normally be sustainable given the evident extreme risks to the banks.

Therefore I could see a situation where they were unable to sell an operating business, but the banks were unable to foreclose or change their terms, allowing the company to pay down debt at its own speed. At this point they are on a genuine P/E of 1x.

Today’s statement reinforces this view.

Note: This is an exceptionally high risk investment. They are likely to struggle to produce audited 2019 accounts, stand a very high chance of being suspended at some point and have a high chance of insolvency.

7:59 cut – STAF

Staffline (STAF) – FY Update

Audit Background

On 27th June (5 months later than the previous year and 3 days before the suspension deadline), Staffline issued their full-year results and Annual Report 2018. Prior to resigning the previous auditors said (amongst other things):

Our preliminary extended audit procedures identified evidence which raised concerns regarding the completeness of information provided previously by management to us in relation to customer claims and disputes.

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7:59 cut – STAF, MMH, DSG

Due to the number of companies reporting important news some sections are briefer than normal.

Staffline (STAF) – Further Issues

Staffline today throw their Finance Director under the bus following misstatement of FY 2018 profits, report a further deterioration in trading across both their businesses, confirm covenants will be missed in December and signpost of the sale of their PeoplePlus subsidiary.

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Staffline – Results and Fundraising

I expected this to be an article summarising all the research I had done so far about Staffline, concluding that this was a great business which ticked all the investment tick-boxes and was well placed to not only weather but take advantage of likely political headwinds.

However upon reading the auditors’ report from the FY 2018 results, I quickly realised that, for me, the share is completely investable unless / until the senior management has been entirely changed, new management bedded in, and a new culture instilled. For those without the time to read the auditors report (or the stomach – it made me so cross it took me several goes to get through it), and to close off my detailed reporting for the moment, I will summarise it here.

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7:59 cut – STAF, LTHM

Staffline (STAF) – Results and fund raising

I sold out of my speculative position earlier in the week because I took the lack of an announcement as a bad sign. I felt that if they had an offer document / placing price then that would be so material that an RNS would be immediately required. And if they hadn’t then they were taking up to the line and so risks were increasing.

They certainly kept us waiting, with the 100p placing RNS not available on London Stock Exchange website until 7:08 and not on investegate until about 7:25 (although backdated). Reminiscent of a bad film, the results went straight-to-website, and evoking the horror genre include the magic words Material uncertainty related to going concern. Note: At the time of writing the results RNS has made it to Investegate but not to the London Stock Exchange website.

I doubt it is a co-incidence that it was their RNSes that were late this morning and so there appears to be a level of ongoing chaos in the group. It is inconceivable that the events of the past 5 months have not affected management focus.

I will be avoiding the shares at least until the results of the accelerated book-build are known, which, if all goes well should be this afternoon / evening. I will post in more detail after this announcement.

Note that the shares are now ex-open offer rights and so (all other things being equal) would be expected to fall this morning. Additionally, based on experience from previous fund raisings, the price is likely to fall to between 95p and 120p over the next few weeks. Given that institutions are now / will shortly be able to trade again, anything much below 95p would be cause for concern.

James Latham (LTHM) – FY Results

Revenue is up 9.4% to £235.1m and ahead of the £228m consensus shown on Stockopedia. As is often the case, it is difficult to tell from broker consensus whether the profit is ahead or behind, but in percentage terms it looks to be ahead. A recent report is available on Research Tree.

They mention Brexit stockbuilding. Other companies have reported that due to increased preparedness from logistics etc. companies that this should not need to be repeated. An additional depot is running 24-hours which should improve margins. A downturn in the UK economy / construction is clearly a risk, but judging by the commentary, not an immediate one.

With only 6 weeks contribution from their recent Irish acquisition in these results, and trading modestly up in the first two months, significant H1 growth is baked in.

This is a solid family company. The valuation is perhaps quite full given the point in the cycle, but this is the sort of company that strategically I would like to hold more of in future.

Staffline – Catching the knife

Introduction

My previous “tick-tock” article had a very narrow focus examining whether there a case for buying at a price depressed by the fear of an imminent suspension in the hope of a bounce once suspension (or the threat of it) was lifted. I concluded that, for me, the answer was no. This article is more general, looking at the history of the company, how it got to this point, what is likely to happen next and their short and long term future.

History

Great!

Continue reading “Staffline – Catching the knife”