Description

P&I has been growing its revenues in the high single digit range for the last several years.  This growth has been achieved through a combination of new customer additions and increasing penetration of the existing customer base with additional software modules.  Less than 5% of the Company’s customers currently purchase its full range of product modules.  Management made a conscious decision 12-18 months ago to begin focusing more heavily on the public sector, which tends to move countercyclically to the corporate market.  This shift has served it well recently in the softening corporate demand environment.  In addition, the Company has recently signed several material deals with large HR outsourcing firms, the most prominent of which is ADP, under which it will completely take over payroll processing services for these companies in the small and midsize customer space.  These deals have the potential to add as much as €10mm in revenue over the next couple of years, which would represent an increase of 15% on the current revenue base.  Moreover, these are true, recurring high margin revenues that will get booked month-in and month-out.  The Company continues to pursue additional outsourcing deals, and the current deals hold promise for incremental volume for P&I if performance is deemed to be satisfactory.

P&I’s financial characteristics reflect the attractiveness of its business model.  Operating margins exceed 25%, return on equity exceeds 45%, and return on invested capital is in excess of 90%.  The business is highly cash generative, which has led to a substantial cash balance that is currently 15% of the Company’s market capitalization.  Management routinely returns cash to shareholders.  The current dividend yield is 6%, and non-recurring extraordinary dividends have been employed in the past.  In October of this year the board approved a €4.5mm share repurchase program, a material program for a company with a market cap of roughly €75mm.  Since its announcement, the Company has been in the market virtually every trading day executing on the program.

P&I’s current valuation does not reflect the quality of its business.  Net of its cash, the Company trades for less than 7x earnings.  In addition, although not an integral part of the investment thesis, a purchase of the Company by one of its larger competitors would represent an easy, low cost way for that competitor to buy market share in the midsize corporate market.  P&I was previously controlled by Carlyle Group, which exited thru a secondary offering in mid-2007.  This offering materially increased the free float, however, trading volumes can still be somewhat sparse.  The sparse trading volumes and history as a privately-controlled company have led to a lack of sell-side coverage, and have contributed to its current status as an undiscovered bargain.  When and if the financing markets reopen, I expect that the business’ cash generative nature will once again make it an attractive potential acquisition opportunity for private owners.

Catalyst