www.davy.ie Bloomberg: DAVY
March 21, 2012
Rating: OUTPERFORM Issued 30/06/09 Flash Note: Company update
Joshua Goldman, PhD [email protected] / +353 1 6148997 CPL Resources
Share Price Performance Price: 298c 350 300 Bottom of cycle established; 300 260 significant upside potential 250 220
200 180 Recent peer reports suggest that UK/Ireland recruitment is 150 140 stabilizing; Ireland showing some green shoots; continental Europe performing well 100 100 • The latest Manpower Employment Outlook Survey for Ireland 50 60 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 shows that 7% of respondents expect an increase in headcount,
CPL price (c) Rel to ISEQ overall index (rhs) the highest percentage since the Q4 2008 survey.
Key financials (€m) • Recruitment peers have been reporting a consistent message that Year end Jun12E Jun13F Jun14F UK/Ireland is a tough environment (although most companies Group Turnover 292.3 310.9 335.8 have kept gross profits flattish), while continental Europe is EBITDA 8.9 9.7 10.5 performing well. PBT 8.9 9.5 10.4 EPS Basic 23.1 27.1 29.7 • The latest (Q4) QNH data show seasonally adjusted growth of EPS Diluted (Adj) 23.4 27.5 30.0 0.6% in employment and unemployment stabilizing at 14.6% Cash EPS (Diluted) 24.9 29.0 31.6 compared to Q3. Dividend 6.0 7.0 7.0 NBV 179.0 198.7 221.0 Potential for growth from recent strategic moves in Europe and in Valuation healthcare sector P/E 12.7 10.9 9.9 • This month, CPL extended its European footprint with the FCF Yld (pre div) (%) 2.8 7.4 8.8 Dividend Yield (%) 2.0 2.3 2.3 acquisition of European Human Resources AB in the Scandinavian Price / Book 1.7 1.5 1.3 market (it now has ten offices outside Ireland). EV / EBITDA 7.1 6.1 5.0 • The company has geographically diversified and now generates Group Int. Cover (x) N/A N/A N/A Debt / EBITDA (x) N/A N/A N/A c.33% of permanent fees from outside Ireland.
Company data • CPL also continues to expand its footprint in the fragmented and Reuters/Bloomberg/Xetra DQ5.I/CPL ID/DQ5 high potential healthcare sector with the acquisition of PHC Sector Recruitment Management and Runway Personnel. Shares (m) 30.5 Daily No. Shares Traded (m) 0.082 Past low point of the cycle; operating leverage to kick in over the Free Float (%) 58.6 medium term; significant upside from these levels 52 Week High/Low 305/243.8 • At the current number of consultants, we estimate that mid-cycle Capital Structure the company could generate net income 50% higher than Mkt. Cap (€m) 91.0 Net Debt/(Cash) -32.2 FY2011 and 40% higher than FY2012E. Our estimated peak cycle Deferred consideration/debt- N/A net income is c.146% above FY2011 and 129% above FY2012E. related The company has paid over €10m to shareholders in the form of Pref Shares/Non Eq Min 0.0 • Minority interests N/A dividends and returned €20m in the form of a share buyback in E.V. (€m) 58.9 CY2011.
• CPL trades at a discount to the sector with a forward Recent research and research resources calendarised P/E of 11.7x (sector 15.6x). Based on mid-cycle Recent research and financial data on CPL Resources earnings, the company trades at a P/E multiple of 7.9x. • We rate the company as an 'outperform' due to its strong balance sheet (net cash €21.5m), potential for continued returns, strong management team and operating leverage, which could see earnings more than double at the peak of the cycle. Our price target is €4.75. Please refer to important disclosures at the end of this report. J&E Davy, trading as Davy is regulated by the Central Bank of Ireland. Davy is a member of the Irish Stock Exchange, the London Stock Exchange and Euronext. For branches in the UK, Davy is authorised by the Central Bank of Ireland and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request. All prices are as of close of previous trading day unless otherwise indicated. All authors are Research Analysts unless otherwise stated. For the attention of US clients of Davy Securities, this third-party research report has been produced by our affiliate, J&E Davy. Flash Note: CPL Resources March 21, 2012
Introduction CPL is one of the leading recruitment companies in Ireland. There are early signs of stabilisation of the labour market in Ireland. The company has taken the opportunity to diversify its product offering by expanding in the home healthcare and continental European market. It is currently trading at a discount to the market and has not participated in the recent recruitment sector rally despite its recent share buyback (17.9% of share capital at the time), strong balance sheet and growth trajectory. We believe that current levels offer a good entry point.
Recruitment sector trading update • The Davy recruitment sector index The Davy recruitment sector index is up 25.4% year-to-date (CPL is up 25.4% year-to-date due to the 15.7%) due to the relatively positive newsflow compared to market relatively positive newsflow expectations. Overall, recruitment companies are seeing a tough but compared to market expectations stabilizing UK/Irish market, while continental Europe is performing well. • In its Q4 trading update, Michael Page reported that EMEA Q4 gross profits were £60.9m, up 15.3% on Q4 2010, while the UK had gross profits of £30.9m, up 0.6% on Q4 2010. The financial services sector and public sector remained challenging. • Hays H1 results revealed that UK net fees were down 6%. The public sector was the main driver of this decrease with net fees down 18% like-for-like, but these have been sequentially stable since April 2011.
• This is the first quarterly increase Although historic, the Q4 2011 quarterly national household survey since Q4 2007 (QNHS) shows a stabilizing employment environment in Ireland, with an improving trend in the numbers of people employed. • On a seasonally adjusted basis, employment increased by 10,000 on the quarter, bringing total employment back to 1.8m persons. This is the first quarterly increase since Q4 2007. This rise follows falls of 1.1% in Q3 and 0.2% in Q2. • The unemployment rate remains unchanged from Q3 at 14.6%.
• The recently released Manpower The recently released Manpower Employment Outlook Survey for Employment Outlook Survey for Ireland also suggests that employment conditions are improving on Ireland also suggests that the island. employment conditions are improving • Of the employers surveyed, 7% expect an increase in headcount — the highest percentage since Q4 2008 — while 10% expect workforce numbers to decrease. • The net employment outlook is -3%. When adjusted to remove seasonal variations, the net employment outlook stands at a muted -2%. This is relatively stable both quarter-on-quarter and year-on-year.
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Flash Note: CPL Resources March 21, 2012
Figure 1: Manpower Employment Outlook Survey Q2 2012 for Ireland
15%
Percent of respondents increasing headcount highest since Q4 2008 10%
5%
0%
Seasonally adjusted net outlook negative but stable -5%
-10%
-15%
-20% Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
Respondents increase headcount Net employment outlook (seasonally adjusted) Source: Manpower Employment Survey; Davy
CPL has expanded its European and healthcare sector footprint CPL has a history of making strategic bolt-on acquisitions, and this trend has continued. The company recently announced that it has acquired European Human Resources AB (ERHAB). ERHAB provides human resources solutions for companies within the Scandinavian market. In the statement, CPL CEO Anne Heraty commented as follows:"I would like to welcome the employees of ERHAB to the CPL Group, this partnership allows us deliver on our strategy to replicate our existing business model in new geographies". Given the brevity of the statement, we assume that the acquisition is relatively small. The acquisition fits well with CPL's strategy of expanding its European footprint. At the time of its financial year results, the company had nine offices outside Ireland and generated c.33% of permanent fees from outside Ireland.
CPL has also expanded into the highly fragmented and fast growing healthcare sector with the acquisition of Runway Personnel (acquired April 2011) and PHC Management (acquired November 2011); combined, these cost €1.2m net of cash acquired. Runway Personnel Limited is an Ireland-based company that provides a range of recruitment solutions in the healthcare sector, including to public and private hospitals, care homes and allied health facilities. PHC is a privately-held company that provides quality, person-centred care and support to individuals in their own homes.
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Flash Note: CPL Resources March 21, 2012
CPL has passed the bottom of the cycle and is approaching mid-cycle; valuation does not reflect this Cyclicality of metrics Below we have performed an analysis based on CPL's performance through the cycle. We focus on two key operating metrics: net fee income (NFI) per consultant (i.e. the amount of gross profit each consultant generates) and the conversion ratio (PBT/NFI), which is a measure of efficiency and operating leverage.
We have estimated mid-cycle NFI per consultant of €135,000 and a conversion ratio of 29%. Based on our estimates, CPL is approaching mid-cycle and that NFI/consultant could be €137,000 by the end of FY2012. However, due to the still significant time and effort it takes for each placing, the conversion ratio is likely to remain stable at 21%. We feel the company could reach mid-cycle levels as the employment environment picks up, specifically permanent placements. The latest data suggest that employment has broadly stabilized and may improve soon.
Table 1: Historical CPL metrics
FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 Average number of 50 76 105 80 94 115 142 176 249 344 238 263 316 recruitment consultants NFI/ consultant ('000€) 152 158 149 110 113 116 141 160 173 153 147 107 117 NFI ('000€) 7,577 11,996 15,600 8,800 10,600 13,300 20,000 28,200 43,000 52,478 34,988 28,216 37,041 Conversion ratio 42% 38% 33% 15% 16% 19% 29% 38% 45% 39% 4.8% 19% 22% Source: Davy; CPL
Figure 2: CPL's NFI per consultant cycle Figure 3: CPL's conversion ratio cycle
400 180 50% 45% 350 170 40% 300 160 35% 250 150 30% Mid-cycle 200 140 25%
150 130 20% 15% 100 120 10% 50 110 5% 0 100 0%
FY1999FY2000FY2001FY2002FY2003FY2004FY2005FY2006FY2007FY2008FY2009FY2010FY2011FY2012e FY1999FY2000FY2001FY2002FY2003FY2004FY2005FY2006FY2007FY2008FY2009FY2010FY2011FY2012e Recruitment consultants (# of employees) NFI/consultant (rhs; €, '000)
Source: CPL; Davy Source: CPL; Davy
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Flash Note: CPL Resources March 21, 2012
Current levels are attractive We have looked at the valuation of the company on both mid-cycle and peak earnings. As we do not believe that previous peak cycle metrics can be easily achieved again, as those were extraordinary times, we have applied a discount to peak metrics when looking at the valuation (below). In our analysis, we assume peak NFI per consultant of €160,000 and a conversion ratio of 40%. This implies significant upside from current levels.
The company has recently (completed November 2011) a share buy- back of 6,666,666 ordinary shares (c.17.9% of ordinary share capital). CPL looks very attractive on both mid-cycle and peak per share earnings.
Table 2: Mid and peak cycle potential earnings
Mid cycle Peak Consultants 316 316 NFI per consultant ('000, €) 135 160 NFI 42660 50560 Conversion ratio 29% 40% EBIT ('000, €) 12,371 20,224 Interest ('000, €) 500 500 PBT ('000, €) 12,871 20,724 Tax ('000, €) 1,609 2,591 Net income ('000, €) 10,762 17,634 EPS ( c ) 35 58 Implied P/E 7.9 4.9 Previous peak fwd P/E(avg FY2007) n/a 18.4 Previous mid-cycle fwd P/E(avg FY2005) 16.3 n/a Implied price 5.74 10.6 Upside 2011 95% 260% Source: Davy; Factset
Given that the company is off the lows of the cycle, we feel that risk is limited whereas upside potential is significant. The only near-term risk – besides a double dip, which at this point we feel is unlikely – is the exact implementation of the EU Directive on Temporary Agency Work. In its broadest form, the EU Directive on Temporary Agency Work requires equal treatment of the temporary worker in respect of working time, rest periods, rest breaks, night work, annual leave, public holidays and pay. As of the publication of this note, the bill has not been signed into law in Ireland.
However, we feel that given management experience in the industry, there will be no long-term effects on the business.
If the company can again achieve mid-cycle operating metrics (which we believe it can), the current market price implies a discount rate of c.12% (which is very extreme) and that the company will reach mid- cycle earnings in approximately six years. This sensitivity analysis to discount rate and time points to the disconnect between the share
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Flash Note: CPL Resources March 21, 2012
price and the company's current trajectory. More likely, the company will reach mid-cycle in the next two to three years.
Table 3: Implied present value of mid-cycle share price
Discount rate (row) 5% 6% 7% 8% 9% 10% 12% 14% 16% Years to mid-cycle (column) 1 5.47 5.42 5.37 5.32 5.27 5.22 5.13 5.04 4.95 2 5.21 5.11 5.02 4.92 4.83 4.75 4.58 4.42 4.27 3 4.96 4.82 4.69 4.56 4.43 4.32 4.09 3.88 3.68 4 4.73 4.55 4.38 4.22 4.07 3.92 3.65 3.40 3.17 5 4.50 4.29 4.09 3.91 3.73 3.57 3.26 2.98 2.73 6 4.29 4.05 3.83 3.62 3.42 3.24 2.91 2.62 2.36 7 4.08 3.82 3.58 3.35 3.14 2.95 2.60 2.30 2.03 Source: Davy
Management has a great track record of sharing the company's performance with shareholders. CPL has returned over €30m to shareholders since 2000, paying more than €10m to shareholders in the form of dividends, and returned €20m in the form of a share buyback in CY2011. The company has already seen the bottom of the cycle and is relatively close to mid-cycle. We estimate that from here to the peak of the cycle, CPL could generate over €60m in free cash flow, which is approximately two-thirds of its current market capitalisation. Given its strong balance sheet, market presence and previous track record, we expect CPL to continue to 'outperform' with a price target of €4.75.
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Important disclosures
Analyst certification I, Joshua Goldman hereby certify that: (1) the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this report and (2) no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in this report.
Investment ratings definitions Davy ratings are indicators of the expected performance of the stock relative to its sector index (FTSE E300) over the next 12 months. At times, the performance might fall outside the general ranges stated below due to near-term events, market conditions, stock volatility or – in some cases – company-specific issues. Research reports and ratings should not be relied upon as individual investment advice. As always, an investor's decision to buy or sell a security must depend on individual circumstances, including existing holdings, time horizons and risk tolerance. Our ratings are based on the following parameters: Outperform: Outperforms the relevant E300 sector by 10% or more over the next 12 months. Neutral: Performs in-line with the relevant E300 sector (+/-10%) over the next 12 months. Underperform: Underperforms the relevant E300 sector by 10% or more over the next 12 months. Under Review: Rating is actively under review. Suspended: Rating is suspended until further notice. Restricted: The rating has been removed in accordance with Davy policy and/or applicable law and regulations where Davy is engaged in an investment banking transaction and in certain other circumstances.
Distribution of ratings/investment banking relationships Investment banking services/Past 12 months Rating Count Percent Count Percent Outperform 50 53 28 77 Neutral 28 30 6 16 Underperform 11 11 0 0 Under Review 3 3 1 2 Suspended 0 0 0 0 Restricted 1 1 1 2
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Share ownership policy Davy allows analysts to own shares in companies they issue recommendations on, subject to strict compliance with our internal rules governing own-account trading by staff members. We are satisfied that our internal policy on share ownership does not compromise the objectivity of analysts in issuing recommendations.
Conflicts of interest Our conflicts of interest management policy is available at www.davy.ie/ConflictsOfInterest. Davy acts as stockbroker to CPL Resources. Investors should be aware that this research has been disclosed to the issuer(s) in advance of publication in order to correct factual inaccuracies. We are satisfied that this has not compromised the report's objectivity. The remuneration of the analyst(s) who prepared this report is based on various factors including company profitability, which may be affected to some extent by revenues derived from investment banking. Davy is a registered market-maker in the securities of CPL Resources on the London Stock Exchange. Davy may have acted, in the past 12 months, as lead manager/co-lead manager of a publicly disclosed offer of the securities in CPL Resources. Investors should be aware that Davy may have provided investment banking services to, and received compensation from, CPL Resources in the past 12 months or may provide such services in the future. The term investment banking services includes acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer. From time to time, Davy may hold a position or deal in the securities referred to in this report. Should an instance arise where Davy has a holding that exceeds 5% of the issued share capital of a company, this will be disclosed in this report.
Other important disclosures A description of this company is available at www.davy.ie/RegulatoryDisclosures. A summary of our standard valuation methods is available at www.davy.ie/ValuationMethodologies. All prices used in this report are as of close on the previous trading day unless otherwise indicated. A summary of existing and previous ratings for each company under coverage, together with an indication of which of these companies Davy has provided investment banking services to, is available at www.davy.ie/ratings. The data contained in this research note have been compiled by our independent analysts, based on a combination of publicly-available information and the analysts assumptions and modelling. Further information is available upon request. This document does not constitute or form part of any offer, solicitation or invitation to subscribe or purchase any securities, nor shall it or any part of it form the basis of, or be relied upon in connection with, any contract or commitment whatsoever. Any decision to purchase or subscribe for securities in any offering must be made solely on the basis of the information contained in the prospectus or other offering circular issued by the company concerned in connection with such an offering. This document has been prepared by its authors independently of the company or companies covered. Davy has no authority whatsoever to give any information, or make any representation or warranty on behalf of the company or companies. In particular, the opinions, estimates and projections expressed in it are entirely those of the analysts and are not given as an agent or financial adviser of the company or companies. In the UK this document is restricted to (i) persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (ii) high net worth entities falling within Article 49(2)(a) to (d) of the Order. Please note that in accordance with the Central Bank of Ireland's Market Abuse Rules, no person, other than a market-maker, may enter into any transaction or arrangement which would have the effect of generating a net economic benefit arising from a fall in the price of the following shares: the Governor and Company of Bank of Ireland, Allied Irish Banks plc, Irish Life & Permanent plc and Anglo Irish Bank Corporation plc. Please refer to the Market Abuse Rules for full details.
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Distribution of research to clients of Davy Securities in the US Davy Securities distributes third-party research produced by its affiliate, J & E Davy. Davy Securities is a member of FINRA and SIPC and is regulated by the Central Bank of Ireland. Davy Securities does not act as a market-maker. Neither Davy Securities nor its affiliates hold a proprietary position and/or controls on a discretionary basis more than 1% of the total issued share capital of this company/these companies. This information was current as of the last business day of the month preceding the date of the report. An affiliate of Davy Securities may have acted, in the past 12 months, as lead manager/co-lead manager of a publicly disclosed offer of the securities in CPL Resources. Investors should be aware that an affiliate of Davy Securities may have provided investment banking or non-investment-banking services to, and received compensation from, CPL Resources in the past 12 months or may provide such services in the next three months. The term investment banking services includes acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer.
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