Any investor worth their salt knows it is impossible to precisely call a bottom in a particular stock. For Gattaca, though, we believe this moment has now passed given the compelling valuation (6.9x EV/EBIT vs 9.8x sector average), attractive 9.8% unlevered cashflow yield and constructive secular trends supporting its specialist markets. Sure, Net Fee Income (NFI) like-for-likes (LFL) have fallen of late, yet equally there are now early indications that organic growth may soon turn positive.
Indeed, despite Friday’s weaker-than-expected trading update, where our FY17 adjusted PBT and EPS estimates were trimmed 15% to £16.7m (£7.4m H1) and 35.0p (16.1p) respectively, the Board this morning reiterated its view that business/candidate confidence is tentatively recovering after June’s shock BREXIT vote – backed up by sequential improvements in LFL NFI (constant currency) with Q3 currently tracking at -2% (vs -3% Q2 and -5% Q1) and Q4 predicted to be slightly up again.
Likewise, the wider UK jobs market also appears getting its mojo back, as evidenced by Robert Walters, Michael Page and Hays, all posting better numbers last week. Admittedly there might be a minor dip in hiring over the next 2 months as a consequence of the forthcoming General Election. Yet, further out this could actually galvanise the country, especially if the Conservatives (as Pollsters envisage) win a thumping majority - which is probably why the Pound jumped almost 2% (vs $) after Tuesday’s announcement.
Structurally too, we believe Gattaca is ideally placed to benefit from rising global spend on infrastructure (Heathrow, Hinkley Point, Crossrail 2, HS2, rail electrification, smart cities), engineering and technology (eg Cyber security, IoT, Cloud, 5G, autonomous vehicles), augmented by X-selling synergies, expansion abroad and the ongoing adoption of IT/Telecoms within its other key verticals of Automotive, Aerospace, Defense, Energy and Maritime.
Sure, there will be bumps along the way – for instance the soft patch in Telecoms NFI (ED estimate -5% LFL), where activity levels have temporarily stalled at a couple of major customers. In response, resource has been reallocated to the ‘sweet-spots’ of network infrastructure, connected world, operating/billing systems and R&D – a refocusing strategy that is already showing encouraging incremental progress within IT.
CEO Brian Wilkinson adding “Performance in H1 reflects the tougher UK trading conditions post EU Referendum. The softening in NFI in H1 was driven by near term uncertainty which led to elongated hiring decisions and some projects being delayed. However the medium-term outlook in our sectors remains positive, … [and the] continuing shortage of Engineering and Technology skills will lead to increased demand from our clients as their projects move through the delivery cycle.”