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Questor: after a 60pc share price fall in one day, dare we hang on to Staffline?
Questor share tip: the recruitment firm has endured a ‘perfect storm’ of problems, including some paradoxical effects of Brexit-related uncertainty
Investors hate any shock and this one came like a bolt from the blue. Last Friday, Staffline, the recruitment and training firm, informed the market of a series of problems and the shares promptly lost about 60pc of their value to close at 339p. As Questor had tipped them at £10.73 in January 2017, this represented a very painful loss indeed for readers who followed our advice.
The company’s warning about poor trading was all the more shocking because Staffline had seemed to be recovering following the suspension of its shares in February.
That resulted from allegations over its accounting practices. When the company announced the resumption of trading in March, Ken Wotton, the investor whose enthusiasm for the stock prompted our original tip, said its statement confirmed that the allegations were “largely baseless”.
However, the matter, which will not be fully resolved until the company publishes its full-year results, expected soon, has affected trading.
“Some customers have delayed the signing of new contracts until the accounts are published,” said Wotton, who runs the Gresham House UK Micro Cap Income fund.
The other two problems disclosed by Staffline last week had nothing to do with the accountancy allegations or share suspension.
The first was that some contracts in its training arm were taking longer to bear fruit, which it put down to slow take-up of an apprenticeship scheme and “the current economic uncertainty”. The second was also related to that uncertainty but in a more unexpected way.
“Ongoing Brexit uncertainty has led to a number of customers transferring a significant volume of their temporary workforce into permanent employment to mitigate the risk of that labour market tightening,” Staffline said. “Typically, this reaction to uncertainty tends to reverse over time, but we expect it to continue to impact temporary worker demand throughout the current year.”
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It said a proportion of these “temp to perm” transfers had occurred in the higher-margin driving sector, resulting in an overall margin dilution. Workers from eastern Europe account for a substantial proportion of the labour supply in this market and the flow of such workers into Britain has “gone into reverse”, Wotton said.
This had caused Staffline’s customers, many of which are in defensive sectors such as food supply, to take steps to ensure that they had enough staff.
“It’s been a perfect storm for Staffline,” Wotton said. “But it’s a company with good-quality management, who we have known for a long time. In the long term these problems shouldn’t affect its market position.”
He added: “The shares have fallen dramatically from an already low valuation. This reaction looks overdone. We don’t expect much recovery until the results are published but we are holding on to our stake.” Questor advises readers to do the same.
Questor says: hold
Ticker: STAF
Share price at close: 326.5p
Update: RWS
We first tipped RWS, the patent translation firm, in December 2016. Even then, when the shares stood at 301p, we suggested that readers look for opportunities to buy on weakness as the stock was looking fully valued at about 35 times earnings.
In fact the shares just galloped higher and have now doubled. Should we continue to hold?
Keith Ashworth-Lord, who manages the SDL UK Buffettology fund, is certainly doing so.
He said: “RWS has successfully integrated three large acquisitions in a short space of time – a rare feat – and is now much more broadly based. The acquisitions have brought cross-selling opportunities and expanded the client list with some quality names, such as Microsoft.
"While RWS is by no means cheap on short-term valuation grounds, the potential for gains is greater now than it was a couple of years ago. We have topped up our holding in recent months.”
He added: “Key financial traits that we watch like a hawk are organic growth, margin development, return on equity and cash generation.
“On all four counts, RWS continues to perform at least in line with our expectations. We are therefore very happy owners of the shares.”
Questor says: hold
Ticker: RWS
Share price at close: 602p
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