Description

PRP is a small UK based recruitment firm. It provides permanent (60% of revenues) and contract (40%) headhunting services to customers in selected niche industry sectors (real estate, built environments, renewable energy, infra, construction, design). Revenues are mostly generated in the UK (65%) and Asia (34%). Insider ownership is significant (>50% of shares) and the Chairman and CEO have been running the business together since it listed in 2006. The core UK operation has been around since 1994.

Steady state EBIT (approximates FCF) should be £2m+. Normal dividend payout has historically been 40-50% of EBIT. Every 3-4 years PRP has also historically paid out excess cash in the form of special dividends (over and above the regular annual dividend). As of the latest results there was £2.1m of net cash on the balance sheet and £0.6m NCI. The current market cap is £9.4m (at 70p/share, on 13.4m DSO) implying an EV of £7.9m. The market is valuing the enterprise at <4x steady-state EBIT. That seems too cheap for a stable business, with a management team that is well aligned to shareholders and that has a history of regularly returning capital to shareholders. I believe an investment in PRP today likely leads to a 2x return in the medium term, with little risk of permanent capital impairment on the downside. The opportunity exists largely because this is an illiquid AIM-listed micro cap stock that was temporarily hit by Covid.

COMPANY OVERVIEW

PRP is a UK based headhunting firm. The company provides permanent (60% of revenues) and contract (40%) headhunting services to selected niche industry sectors under a couple of different brands. The main subsidiary is Macdonald & Company which specialises in real estate and built environments (eg investment, development and property management roles). Other key brands are Prime Insight, Prime Energy and Command which cover: technology & digital transformation; renewable energy & sustainability; and infrastructure, construction and design respectively.

PRP has two offices in the UK (London & Manchester) and international offices in Hong Kong, Dubai, Singapore, Frankfurt and a franchise in South Africa. In Sep-20 they also opened their first office in the US (Houston, Texas). The majority of business is done in the UK (65% of sales) and Asia (34%). As of FY20 there were 71 FTEs in the UK, 60 in Asia and only a couple across the other offices. While the UK business grew 3.4% pa FY11-20 (from £11.6m revenue to £15.7m), Asia grew at a much faster 26.7% pa (from £1.0m revenue to £8.2m o/w less than £2.0m was acquired).

The Chairman, Robert Macdonald, has been in the industry since 1973. In 1994 he founded Macdonald & Company which was then merged into Prime People PLC in January 2006. He owns 23% of shares outstanding. The Managing Director, Peter Moore, joined Macdonald & Company in 1995, later becoming MD. He subsequently became the MD of PRP after the merger and currently owns 24% of shares outstanding. Other directors own another ~ 12%. The team have historically been prudent with shareholder capital. They have proactively identified surplus cash whenever it has arisen and returned that to shareholders through special capital reductions (eg £2.0m in FY20, £1.8m in FY15). There have been no transformative acquisitions over the L14Y and management have always stressed shareholder value with regards to M&A in their annual letters.

The business is well positioned in its markets. In the UK for example, Macdonald & Company has been the preferred recruitment partner of the Royal Institution of Chartered Surveyors (RICS) for over a decade. RICS has around 140,000 members of which a majority are based in the United Kingdom and as such the partnership is a key advantage for Macdonald & Company. In Asia, the Command business has been operating since 2005 and is well known and respected in its market.

In summary: a well-run and capital light business, in a relatively un-exciting industry, with a management team whose interests are aligned to shareholders’ and who have a record of successfully growing the business while behaving in line with shareholders’ interests.

KEY FINANCIALS

Summary financials and ratios as of the most recent earnings release Sep-20 (FYE March, £m):

* EBIT approximates FCF over the long run (FCF defined as pre-tax CFFO - capex - lease costs)

* £2.0m un-utilised debt under UK Government’s Coronavirus Business Interruption Loan Scheme (“CBILS”); historically a debt free business

For context, recent Sales/EBIT/FCF trends as follows:

Over L5Y, pre-tax ROC has been in the low to mid teen area.

COVID IMPACT

As you can see from the financials section above, the 6me Sep-20 were heavily impacted by Covid. Revenue was down 34% on the 6me Sep-19. However, PRP were able to remain close to break-even at the EBIT level as a result of sensible cost base management and by making use of available government employment protection schemes. PRP also secured £2m of CBILS funding as a precaution. That remained un-utilised at the period end. FCF remained positive for the period. Overall, while the top line was severely hit, the company’s solid cash position, flexible cost base and low capital intensity meant that PRP weathered the storm with its long term prospects unscathed.

VALUATION & RETURNS

I expect medium term steady-state revenues in the £25-30m pa range. The UK should remain a ~£15m revenue business while Asia should be able to grow into £10-15m of revenue over the coming years (since FY17, Asia FTEs are up 1.8x (33 heads to 60) while revenues are only up 1.6x; over time revenue has historically outpaced FTE increases suggesting latent growth remains in Asia today). I don’t assign any material value to the RoW regions as they are historically de minimis but if the new US office follows the trajectory of the Asia business, then there could be upside from that segment as well. At ~8% margin, these assumptions put EBIT in the ~£2.0-2.5m range (a range already reached in ~3 out of the L5Y).

Current EV is therefore 3.2-4.0x my base EBIT range. This seems cheap given that: (a) the business is not in structural decline; (b) the UK business is well positioned in its niche, has been around for decades and has shown decent stability for the L10Y; (c) the Asia business has grown impressively since inception; (d) management own >50% of the shares outstanding; (e) the business has a good track record of returning capital to shareholders.

 A normalised EV/EBIT of at least a 6.0x feels reasonable, given:

•  PRP traded at an average EV/EBIT of ~6.0x for majority of L10Y  

•  When PRP first went public via reverse merger, it was bought for ~6.0x

•  In their Goodwill modelling, management assume 6.0x EV/EBIT in valuing the CGUs  

•  EBIT approximates FCF so 6.0x implies a 17% FCF yield – seemingly high for a business that isn't about to disappear

At 6.0x EBIT, EV would be £12.0-15.0m. Adding £2.1m of net cash and subtracting £0.6m NCI, gets to a market cap of £13.5-16.5m (101-123p / share) or 1.4-1.8x current. Note, the low end of this range assumes essentially no improvement on performance of the L5Y which is probably overly conservative given the record of the Asia business and the new US office opening.

Beyond the capital appreciation potential, a buyer today should also be getting at least a ~10% cash yield. Management have paid a dividend every year since listing and this has typically been around 40-50% of EBIT (ie £0.8-1.3m pa on base case EBIT). On top of that, management have periodically returned surplus cash through special distributions (eg in FY20 & FY15 they paid out cumulatively ~£3.8m in special distributions – equivalent to 40% of current market cap). In fact, over the L5Y, the average trailing 5y cumulative shareholder distribution was ~£6.0m or 64% of current market cap – if that continues, a buyer at today’s prices is likely to get the majority of their basis back through distributions in the next 5 years.

I look at this like a bond investment. Purchase the “bond” at 57-70% of Par (£9.4m), receive at least a ~10% current yield (£0.8-1.3m pa, upside from any special distributions) and eventually sell at Par (£13.5-16.5m). Even if it takes 5 years to reach Par, and there are no special distributions, that should still be close to a 2x return / 15%+ IRR. Meanwhile, it is difficult to see how the business could be worth less than the current market price to a knowledgeable buyer. Also, the balance sheet is very clean with strong cash balances, leaving minimal risk of permanent capital impairment.

INVESTMENT MERITS

• Cheap valuation relative to historical achievements

• Low risk of permanent capital impairment

• Management team aligned to shareholders

• History of meaningful and regular distributions to shareholders relative to current market capitalisation

• Well positioned UK business & latent growth in Asia business

• Asset light + highly cash converting business model

DOWNSIDE

Barring catastrophe, the risk of permanent capital impairment for the long-term investor should be low. PRP has a strong net cash position, cash conversion is high, the cost base is demonstrably flexible, management have a sizable ownership stake and the capital allocation record has been consistently shareholder friendly. Furthermore, the current price looks cheap enough to absorb a lot of potential hiccups – even off of a L5Y trough EBIT figure, a buyer today is creating at just 6.6x EV/EBIT [£7.9m / £1.2m].

I think that the main risk to achieving the returns outlined would be a change in management’s approach to capital allocation. I see that as low probability and take comfort from their meaningful ownership stake and their track record of behaving well over a number of years. The other risk would be a severe global recession that depresses revenues and profitability for a couple of years. I take comfort from the fact that this would also give the long term investor an opportunity to average down and buy more of what should be a reasonably enduring business at discounted prices.

Catalyst

§  Reporting normalised results  

§  Dividends & special distributions