Gattaca – headcount reductions and restructuring makes this an excellent recovery candidate

Recruiter Gattaca had a really awful year in 2020 but has very strong potential to recover massively this coming year and subsequently, writes Mark Watson-Mitchell.

As we come out of the lockdowns it is already becoming very evident that employers in several sectors are desperate to engage new staffing.

Now let me tell you that for decades I have tried to steer clear of the employment agency sector because the market always seems to give such companies an extremely high rating, which I find extraordinary considering that it is such a highly cyclical sector.

However, today I am profiling one company within that sector that had a really awful year in 2020 but has very strong potential to recover massively this coming year and subsequently.

An excellent geographic spread

Gattaca (LON:GATC), which was formerly the Matchtech Group, was set up way back in 1984 and listed on the AIM market in 2006.

It provides recruitment solutions and support to its clients mainly within the engineering and technology sectors.

The group has two main operating divisions – Matchtech and Networkers.

On the engineering side Matchtech caters for the aerospace, energy, infrastructure, maritime, automotive, general engineering and engineering technology sectors. 

On the technology side Networkers looks after its clients in the cloud, leadership, enterprise resource planning, security, development and communications sectors. It also handles clients in engineering technology.

The group, which has a global headcount of 477 employees, has offices across four continents, giving it a global presence in attracting business.

Restructuring took place in 2020

Over the last year the group has been reorganising itself against the pressures of Covid-19. It has also put in place a reduction of its UK headcount, cutting it down from almost 700 at the start of 2020. 

Annualised savings from this restructure are computed to be some £4m per annum. 

The group’s net fee income (NFI) declined by 34% year on year by the interim stage to end-January this year. However, that decline has been partly mitigated by a big cost reduction programme being underway.

Big demand for STEM

Today the group is focused upon the skills demand in science, technology, engineering and manufacturing (STEM).

It operates in the growth sectors of infrastructure, defence, energy and mobility.

Overall, the company has a 70% contractor-to-recruitment mix, with contractor business being much more profitable than permanent due to longer term recurring margins.

The solutions mix represents some 25% of NFI, generally on multi-year agreements where the group services 100% of the client’s requirements.

Going forwards

In the group’s favour, as it goes forward in its restructured state, is that there is increased government spending on technology focused defence projects and infrastructure projects, both of which tend to be long term in nature. 

Elsewhere, in the energy sector there is an increasing focus on renewables which the group considers offers it long-term growth opportunity.

Obviously, technology continues to be a key growth driver across all the group’s markets.

Interesting equity holders

There are some 32.29m shares in issue.

George Materna, who set up the group and is the group’s non-executive Deputy Chairman, retains 24.40% of the equity. Another individual holder is Paul Raine with 5.5%.

Larger investors in the shares include MMGG Acquisition (15.97%), Chelverton Asset Management (6.10%), HRNetGroup (Singapore) (4.85%), Winterflood Securities (3.62%), Hargreaves Lansdown Asset Management (3.28%), and the Matchtech Group SIP (3.16%).

One interesting outside holder

MMGG owns the Morson Group, which with some 1,500 plus staff is the largest technical staffing consultancy grouping in the UK. 

It has operations in Canada, the USA, and Australia and largely clients in the same sectors as Gattaca. 

As it has grown, Morson has become much more acquisitive – do they have Gattaca in their sights or are they just good friends? 

Broker estimates

Liberum Capital, the group’s corporate brokers, estimates that the current year to end-July will see the group make some £404m of sales (£539m), with pre-tax profits falling to just £0.5m (£4.6m). Earnings are expected to fall to a mere 1.1p per share (10.3p).

But it is not on current year hopes that I suggest that the shares are attractive. Instead, I use the broker’s estimates for the coming years of 2021/2022 and 2022/2023. They see sales of £484m then £521m, with profits leaping to £5.9m then £6.8m, worth 13.4p and 15.5p in earnings respectively.

Seeds of recovery 

Patient investors in the shares are just a couple of months away from the ‘recovery’ year starting.

Just look at the ratings of its peers, like Michael Page, Hays, Robert Walters and SThree and you will see how high their ratings are compared to Gattaca, well over twice the group’s 2021/2022 rating.

My View

We should be getting a full-year trading update on 17 August, when, hopefully, the group will have positive news of its prospects for the coming two years.

Even though the group’s shares have risen quite considerably over the last six months, from just 44p last November, Liberum have a ‘buy’ rating on the group’s shares, now 148p.

I will now fix my target price at 185p.