PeopleIN: Well placed to capitalise on a strong outlook

About the author:

Kurt Gelsomino
Author name:
By Kurt Gelsomino
Job title:
Former Analyst
Date posted:
21 February 2022, 9:30 AM
Sectors Covered:
Building Materials, Industrials, Gaming

  • PPE's 1H22 result exceeded our forecast. Organic EBITDA growth was 10%, with Technology (revenue +190%) the standout. Cash conversion was also strong.
  • With continued organic growth expected in the 2H22 and incremental M&A contributions of ~A$2.5m EBITDA, we think PPE is on track to hit the upper-end of it's A$45-47m guidance range. Our FY22 EBITDA forecast rises 2.2% to A$46.5m.
  • We continue to see PPE's positive earnings outlook, capacity for accretive M&A and growing Technology vertical as supportive of a re-rating. Add maintained.

Technology vertical drives solid interim result; strong cash generation

PPE delivered 1H22 sales of A$315.8m (+58%), underlying EBITDA of A$21.6m (vs. A$21.0m in 1H21) and underlying NPATA of A$13.9m (+2%). The results were 5.4% ahead of our EBITDA forecast and 8.5% better at the NPATA level. We note 1H21 underlying EBITDA included A$6m in net JobKeeper benefits. The EBITDA margin was largely steady on the 2H21 result (no JK) at 6.8% and is expected to be maintained broadly at this level going forward.

While COVID restrictions created disruptions across Health & Community and parts of Industrial Services, the Technology business performed very strongly (revenue +190% to A$54.0m; 93% of uplift was organic growth) with reported EBITDA margins extremely healthy at ~13.5%.

M&A contributed A$3.4m to the group, which implied a base business result of A$18.2m and 10% organic growth on 2H21. Industrial & Specialist Services reported 8% organic revenue growth and Health & Community posted 3.3%.

Normalised operating cashflow was strong, rising to A$12.7m from A$9.8m the pcp (conversion ~91%) and adjustments to the reported result (A$11.1m) were more limited. Net debt was A$29.2m (vs. A$25.3m at FY21) and leverage remained steady at 0.67x.

Post the acquisition of Perigon, PPE flagged up to a further A$40m in B/S capacity to pursue additional M&A opportunities across technology upskilling, food services and government (while maintaining leverage <1.5x).

FY22 outlook is positive; clear strategy in place to take the business forward

PPE provided FY22 underlying EBITDA guidance of A$45-47.0m, which includes the A$1.5m 4-month contribution from the Perigon acquisition in the 2H22. Guidance implies 2H22 EBITDA of A$23.4-25.4m.

With half-on-half organic growth of 3-5% expected (A$0.6-1.1m uplift; implies +10-13% on 2H21), the Perigon contribution and incremental A$1.0m (vs. the 1H22) from the Techforce/Vision Surveys acquisitions (taking incremental FY22 contribution to A$7.8m), we estimate a potential 2H22 EBITDA range of A$24.7-25.2m and implied FY22 range of A$46.3-46.8m which was ahead of our previous forecast of A$45.5m.

Overall, PPE highlighted a positive outlook across each of its segments, which are expected to benefit from strong employment markets, unprecedented client demand and wage inflation (limited 1H22 benefit).

While subject to Federal/State Governments' ongoing approach to the pandemic, PPE's COVID-impacted verticals (H&C, hospitality and childcare) should benefit from easing restrictions.

Management outlined a number of key strategic priorities ahead of its upcoming strategy review in March/April, as it looks to position the business for its next stage of growth.

Key initiatives include:

  1. increased sourcing of international candidates as Australia's borders reopen
  2. greater cross-selling of its services across is existing and new (accounting & finance) verticals
  3. growing its Federal Government exposure (~8% of 1H22 GP; ~20% 3-yr target) following its recent GMT People acquisition
  4. invest in its upskilling capabilities to continue to evolve its candidates/client offering
  5. progress its Systems Consolidation project to realise efficiency gains over the next ~2-3 years.

Forecast changes

Following PPE's stronger than expected interim result and positive 2H22 outlook, we have increased our FY22 EBITDA forecast 2.2% to A$46.5m and NPATA has risen 2.5%. FY23/24 NPATA upgrades are more modest at 0.7%/0.8%.

Investment view: Maintain Add rating

Despite a muted market response, we found it hard to fault PPE's interim result - 1H beat, strong cash generation, positive outlook driving slight forecast upgrades and a solid strategy outlined to support the next phase of growth.

With the stock trading on an FY23F adjusted PE of ~11.5x (vs. 13x 3-yr avg; >14x 1-yr avg), we continue to see scope for the stock re-rate given its favourable earnings outlook and capacity for accretive M&A. In our view, the earnings quality of the business is also improving as its high-margin Technology vertical continues to grow.

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