JOB: $0.49

Summary:

GEE Group (JOB) an obscure, but otherwise relatively standard temp/perm staffing company, currently, and temporarily, sits in penny stock land thanks to a highly dilutive equity raise which eliminated toxic debt and reset the capital structure and but which has also positioned the company for solid organic and acquisition growth going forward.  

Despite trading as a penny stock, Gee Group is a real company with $140M revenue and north of $10M ebitda in 2021 (Sept FY).  The only remaining debt is $16M of PPP loans which are in the forgiveness pipeline and should be gone w/i 3-6 months. The company has $7M in cash and is FCF positive post the equity for debt refi mentioned above. After reporting losses in 2019 and 2020 due to high interest and amortization charges from acquisitions in 2016 and 2017 and of course the severe Covid induced demand downturn in 2020, GEE Group is poised to report profits and strong free cash flow going forward. We expect the company to announce a reverse stock split in the coming months along with the forgiveness of the remaining PPP loans.

Management has done this before and the company has an unusually experienced board for a micro-cap stock.  CEO Derek Dewan was formerly CEO at Accustaff/MPS which he helped build from 1994 and ultimately sold to Adecco for $1.3B in 2010. Dewan joined GEE Group in 2015 with the acquisition of Scribe Group where he was chairman and CEO.  The CFO Kim Thorpe has public company CFO experience and worked with Dewan at Coopers & Lybrand.

The board includes a number or experienced and reputable business people who were previously on Dewan’s board at Accustaff/MPS including William Isaac, Darla Moore and Peter Tanous. Another interesting recent (2020) addition is Carl Camden, the former CEO of Kelly Services.

The board and senior management participated in the capital raise back in May 2021 at 60c. While we would like to see a more meaningful $ commitment to the company, management and the board do own over 5% of the company and have likely been restricted for much of the past 12-18 months given all the refinancing activity.

JOB still below that equity raise at the current price of 50c.  To anticipate a question: I have no idea why the stock popped today but given the upside to my $1 target there is plenty of room to go.

Valuation at 5X ebitda (4.6X ‘22E) is half of larger industry peers.  JOB also has entirely US exposure and heavily IT and professional weighted thus positioning the company quite well for the current tight labor environment.  

On 2022E EBITDA of $12M, a 9X multiple + $10M net cash = $118M or just over $1 /share on fd share count of 116M.  (Note assumes forgiveness of remaining $17M in PPP loans)

JOB currently trades 20% below BV.  It’s CHEAP.

Timeline

2015: company reset - current mgmt. team takes over.

2015-2016: 3 solid IT focused acquisitions – Access, Agile and Paladin

2017: 4th acquisition – SNI, a bridge too far. High price (9x) and needed too much work.

2018-2019: restructuring and integration of SNI.

2020: Covid downturn, did buy out Seller notes for 10-15c on the dollar.

2021:  Balance sheet rescue/reset.  Issued 96M share at 60c took out all 16% debt.

2022: Growing, debt-free company emerges. Organic growth, restart of accretive m&a.

Organic Growth

GEE was severely impacted by Covid with both permanent placement and contract staffing suffering sharp demand falloff. The recovering is running that scenario in reverse with high demand for both segments.  While not yet back to 2019 demand, GEE is closing in fast.  The only laggard remains the light industrial segment which can’t find enough workers to meet rising demand.

Post the current accelerated growth during the recovery from Covid we expect GEE’s organic growth to be in line with LT industry growth of 3-5%.  The company does have subsidiary specific organic growth strategies which may produce above average growth in the IT focused segments but for simplicity, let’s call overall all company growth prospects in line with the marketplace.

Margins are currently about 8% on an ebitda basis but mgmt thinks leverage exists to get to 10% with revs in the $200-$250M range from $140M currently. Corporate overhead is currently about 3% of revs. The company has balanced cost discipline (e.g. converting the Houston office to virtual) with growth initiatives (e.g. opening in Austin).

M & A strategy should restart.  

The Plan back in 2015 was to build the company through organic growth and acquisition and run the Accustaff/MPS playbook likely through to an eventual sale to one of the majors. The company grew rapidly from $40M to $80M and then to a peak of $165M with the SNI acquisition.  The initial results, acquisitions of Agile ($20M revs), Access($20M) and Paladin were promising and still represent strong growth brands within the GEE Group family.  The 4^th, SNI ($80M revs), was too large a bite and stretched the company’s balance sheet and management. High cost debt/cap structure hamstrung the company and when Covid hit, emergency triage became necessary.  Management actually did a nice job in March of 2020 taking out the acquisition sub debt and preferred at a massive discount  (10-15c/$1), but the final refi round in May 2021 was massively dilutive due to a plunging stock price in the midst of the round ( Think Equity special) and some hardball by the buyers. The 16% effective cost of the debt was strangling the company, preventing both M&A and even any investment in organic growth initiatives, so management and the board bit the bullet and took the personal dilution hit and did the equity raise.

Now that the balance sheet has been completely recast, with net cash of $7M and growing, the M&A engine can restart, albeit at a more measure pace.  Given the prior leverage experience, management wants to use a better balance of cash, some debt, seller financing, earn outs and equity to fund future consolidation activities.  The company does have about $5M of cash above its required w/c needs and $13M available under its $20M CIT facility.  Given the prior experience they are trying to avoid a lot of senior leverage. At the current valuation of 5X EBITDA, equity is largely off the table so I would expect relatively modest acquisition activity until equity can be used in an accretive manner.

In fact at the current valuation, I think a buy back is more likely than acquisition related issuance.

Given the highly fragmented nature of the staffing industry the company should be able to find suitable targets in the 6-8X range pre-synergies (4-6X post).  Target size is $25-$50M revs, $5-$10M in ebitda with solid local management. Focus is on IT related local/regional franchises.

Eventually we do expect this management team/board to sell the company but our sense is they want to get a better valuation and restart the M&A process for a bit before doing so.

Background and other details

GEE Group has been public since the 1960s and the predecessor companies date back to employment offices opened in 1893. The company provides temporary and permanent professional, industrial and physician assistant staffing and placement services. Specific focus is IT, finance, accounting, engineering and medical scribes. GEE’s Triad sub is a small light industrial temp staffing business, however this should be considered non-core and could be a sale candidate.  Currently, Triad provides good cash flow, albeit at lower margins and with lower LT growth prospects.

Revenue split is 75% contract (temp) staffing, 12% direct (permanent) placement and 13% light industrial temp staffing.

End Market mix is >40% IT, 40% finance and accounting, <5% each for engineering and healthcare and the remainder 10-15% light industrial.

GEE operates about 30 offices in 11 U.S. states with 7 each in FL and OH and 4 in TX.

PPP Loans: $20M across 9 PPP loans. $3M forgiven to date. Remainder in pipeline, expect 100% forgiveness.

Since 2015 GEE has acquired four staffing businesses, Access, Agile, Paladin and SNI. The first 3 were relatively small, the last, and largest, SNI, nearly killed the company.

The current management team joined the company with the acquisition of Scribe Solutions.

The company operates through a number of subsidiary franchises acquired over the years including Access Data, Agile Resources, BMCH, Paladin Consulting, Scribe Solutions, SNI and Triad.  Other owned trade names include Ashley Ellis, Certes Financial, General Employment Enterprises and Omni One.  (Even with some logical market segmentation/local reputation factors, there are probably too many logos/subs but I expect some rationalization going forward)

NOL: the company does have a $10M NOL.

Ignoring about 1.3M options as of 2020 10K as average strike was $2.80.  Do include about1.5M cliff vesting (2022- 2024) restricted shares and about 1M options granted in 2021 with strikes in the 50c range.

Covid severely impacted the company and the balance sheet was poorly positioned given the large amount of debt assumed to complete the SNI acquisition in 2017.

In June 2020, the company settled $47M in sub debt and preferred for $5.1M in cash and 1.8M shares.

In May 2021, the company completed a highly dilutive equity raise at 60c which resulted in the issuance of 96M shares but also eliminated the last of $56M in debt and $5M in fees payable and left the company with net cash $7M and the $20M in PPP loans.

GEE continues to recover from Covid related business disruption. 2021E revs ar estimated at $140M up from $130M in FY 2020, but still below 2019’s $152M.

GPM reflect permanent placement at 100%, all permanent placement expenses included as S,G&A.  Professional temp staffing has GPM in the mid/high 20’s, while light industrial GPMs are below 20%.  Weighted average GPMs are in the mid-30s.

GEE reported sizable losses in 2019 and 2020 due to high interest expense and amortization of intangibles from prior acquisitions and the additional impacts of Covid in 2020.

FY 2021 is the year that GEE turns solidly earning and FCF positive with a net cash balance sheet and continued strong organic growth and FCF in 2022.

Management owns about 5%. Restricted Stock (cliff vest ‘22-24) and recent options grants will boost this over time

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