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UK – Staffline issues profit warning

17 September 2019

Staffline Group (STAF: LSE), the UK-based recruitment and training organisation, published its unaudited interim results for the six months ended 30 June 2019 accompanied by its second profit warning in four months. The company reported revenue of £534.6 million, an organic decrease of 12.4% compared with the previous year.

£ millions) H1 2019 H1 2018 Change Organic Change
Revenue 534.6 481.0 11.1% -12.4%
Gross Profit 45.0 53.6 -16.0% N/A
Gross Margin 8.4% 11.1% N/A N/A
Underlying Operating Profit 3.7 16.3 N/A N/A

Revenue during the first half of the year was driven by acquisitions. Group organic revenue, excluding business acquisitions in the past twelve months, declined by 12.4%.

Staffline said the first half of 2019 “presented a number of unforeseen challenges”. The company said this uncertainty was primarily borne out of the delay in the publication of its 2018 final results. 

Both of the group’s divisions, Recruitment and PeoplePlus, reported organic decreases in revenue. The company said the decrease reflected the trading headwinds in both divisions, and the transition of the PeoplePlus division to a skills and training business.

In its outlook, Staffline said trading remains challenging and the Board now expects the group to deliver full year adjusted operating profit (profits before interest, tax and non-underlying charges) of approximately £20 million.

“Since the publication of the 2018 full year results, weak consumer confidence has weighed on our end customers, particularly in food and retail, which has had a direct impact on demand for Staffline’s services,” the company stated.

According to Reuters, Liberum analysts said the results were worse than expected, putting their rating on Staffline’s stock under review.

Net debt has increased by £26.2 million from December 2018. In July 2019, the group completed an equity capital fundraising to reduce the indebtedness of the group. Staffline said it recognised that the consequent level of dilution was disappointing for existing shareholders. It added that the equity capital raise delivered net proceeds of £37 million, “meaning that the financial position of the group is now stronger, reducing expected year-end leverage to c2x EBITDA.” 

In its full year 2018 results, Staffline reported a statutory loss before tax of £9.6 million which reflected a provision for penalties and remediation costs after failing to pay the national minimum wage as well as restructuring charges for the group’s training division, PeoplePlus.

Last month, the company announced that it received a letter of resignation from its auditor PricewaterhouseCoopers. Staffline said it would commence a competitive tender process for the role of the group's auditor shortly. 

Revenue by division

£ millions) H1 2019 H1 2018 Change Organic Change
Recruitment 493.2 429.6 14.8% -10.3%
PeoplePlus 41.4 51.4 -19.5% -29.5%

Within Recruitment, the company said there has been a slowdown in new contract momentum in the current financial year, which it largely attributes to the impact of the delay in publication of the 2018 full year results.

Staffline also reported that a successful transition from a Work Programme provider to the UK's leading skills and training business is now complete. 

“Brexit uncertainty has been impacting the UK labour market and has led to a number of customers transferring a significant volume of their temporary workforce into permanent employment to mitigate the risk of a skills shortage, as the labour market continues to tighten,” Staffline stated. “Typically, this reaction to uncertainty reverses over time, but we expect it will continue to impact temporary worker demand throughout the current year.”

Chris Pullen, Chief Executive Officer, commented, “The delay in the publication of the 2018 final results created uncertainty, which has been compounded by a challenging trading environment. As a consequence of this and the transformation of PeoplePlus, this year’s result will be more heavily weighted than usual towards the final quarter.”

“Brexit has become the source of unprecedented uncertainty for our end customers and is increasingly weighing on consumer confidence,” Pullen continued. “The performance of our end customers in food and retail has a direct impact on the demand for our services. Despite this, we remain convinced that the challenges the group is currently facing are short-term and that the business is sufficiently differentiated in its service proposition to return to future growth. We have developed an excellent platform as a result of the strategies we have put in place, and look forward to continuing to further enhance the leading positions we have in each of our core markets.” 

The group added that it remains committed to delivering its five-year growth strategy, which it started in 2018.

“We do not believe the issues and distractions of H1 2019 have caused any permanent damage to the business, but that we have simply lost time in the development of the group,” the company stated. The Board added that it remains confident in Staffline’s medium and long-term growth prospects.

During the period, Staffline announced that John Crabtree, Chairman, intended to step down as a director of Staffline. He will leave the Board today and Tracy Lewis will assume the role of Non-Executive Chairman with immediate effect.  The company also announced the appointment of Richard Thomson as Non-Executive Director with effect from 17 September 2019.

Following news of the company’s profit warning, Staffline traded at £120.00, tumbling down 22.08% on the day and 42.54% above the 52 week low of £84.19 set on 20 June 2019. Based on its current share price the company has a market value of £107.53 million.

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