Profit expectations maintained
We are encouraged by several aspects of the pre-close trading update covering H1, not least the outcome and movement in net cash. A renewed focus on the cost base should result in improving conversion rates, offsetting any further shortfall in fee income during H2. We remain confident that a recovery in Gattaca’s markets should emerge during Q4 ‘24/early FY25 supporting a further re-rating of its shares.
The Group’s business development team has been very active during the period, adding two new MSP contracts and overseeing a renewal of two contracts on broadly similar terms. In addition, the pipeline within the Projects divisions continues to grow, which bodes well for FY25
The yoy shortfall in NFI of 16% during H1 includes a large RPO contract which ended in September. The H2 ‘23/H1 ’24 comparison is as a result more favourable, with the larger contract included for just two months of the former period, with fee income down 8.6%. Overall, contract NFI was more stable, declining 6% yoy, compared to 38% in perm.
H2 ’24 onwards will witness a greater focus on productivity, resulting in outgoing sales heads in the business not being replaced and further room for cost cutting within perm focused employees. Over the medium term, we expect administration headcount as a proportion of total heads to move towards best industry practice of c.25%, down from the current 32%.
We think the outlook for CY24 remains an upbeat one, notwithstanding a challenging start to the year. Confidence is likely to improve as the effect of higher inflation dissipates and with it interest rates finally begin to fall. This should result in a recovery in its markets, initially witnessed in contract and latterly in perm placements, which augurs well for conversion rates on a lower cost base.
Valuation and ratings remain undemanding
Should we be proved correct on a recovery in the Group’s markets then the current valuation appears too low. As investors chase incumbents of the sectors best placed to witness an early uplift in economic activity levels, we expect GATC shares to be re-rated ahead of later potential upgrades to estimates in FY25 and beyond.
Based on a DCF model we retain our fair value / share at 175p.