Gattaca plc (GATC)
The results for the six-months to January are robust against a backdrop of declining confidence in both clients and candidates generally. With an improvement in the contract book during early Q3 we think this highlights that the tide is starting to turn and likely to feed through to demand for permanent hires ahead of the CY24 end. With net cash accounting for over 70% of the current market capitalisation, the operating business appears undervalued.
The results for the half-year to January were broadly in line with expectations, as declining economic confidence reduced NFI by 12.8% yoy, with the UK down 10%. The decline in perm activity was largely responsible for the shortfall, with contract activity remaining robust during the period. Adjusted PBT improved modestly, with the higher interest received offsetting the decline in the conversion rate. With taxes higher due to international losses and disallowables, adj. EPS was unchanged yoy at 1.6p.
Costs have reduced further, with an emphasis on adjusting headcount, property exposure, and the Group’s international footprint. Should recovery emerge as anticipated, headcount will be grown inline with contract opportunities.
Several new contracts/renewals were awarded during the period, likely to benefit H2 onwards and reflecting a resurgent business development team. Encouragingly, the number of contractors on assignment increased modestly during the period, with further improvement into Q3. We continue to hold the view that recovery in activity levels should feed through before the end of CY24, recognising macro uncertainty of a political and economic nature. Any recovery should feed through disproportionately to profitability, in view of the operationally geared business model.
Management continues to add headcount in its targeted areas of focus, increasing dominance in such segments. The new Chair of the Board has examined, challenged and ultimately validated this strategy to improve market share within key disciplines.
Looking forward
We have taken a more conservative view of the outlook, reducing FY24 estimates in line with new guidance, albeit still anticipating meaningful growth in activity levels – including a recovery of the higher margin perm activity in FY25.
Such a recovery is not reflected in the current valuation. The operating business – on stripping out the net cash – is valued at just £10.5m. We think this makes no sense at all in view of our expected EBIT of £1.9m in FY24 and £2.5m in FY25. As such, we set a fair value of 140p / share.
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