Empresaria Group is just the job

Two things value investors look for is a low price to earnings ratio and a consistent record of earnings growth, both of which Empresaria (LON:EMR) offers.

Add in the fact that the professional staffing firm doubled its dividend last year and, if you'll forgive the pun, the shares start looking just the job.

Founded in 1996, and listed on AIM since 2004, the company has a seemingly paradoxical philosophy, being both heavy on specialisation and averse to putting all of its eggs in one basket.

It achieves this through a multi-brand approach; each brand is a semi-autonomous unit specialising in its chosen fields, but there are enough brands under the Empresaria umbrella to ensure the group has a decent geographical and sectoral spread.

The group operates brands in 18 countries across six separate sectors: Technical & Industrial; IT, digital & design; financial; retail; executive search; and healthcare.

Each brand seeks to be a leader in its field, tailoring the brand to the specific needs and requirements of the clients and the candidates.

"It's more like an inch wide and a mile deep, than a mile wide and an inch deep," says chief executive Joost Kreulen, explaining the company's philosophy.

Almost all of the company's net fee income (NFI) comes from recruitment, with a bias towards temporary staffing, which accounts for 61% of NFI.

Over half of the group's brands operate in more than one country, and geographically the group's operations divide into three areas: the UK; continental Europe; and the Rest of the World.

For Empresaria, the Rest of the World is essentially Asia Pacific and, increasingly, Latin America.

On the European mainland, the focus is very much on Germany, and not just for the obvious reason of the nation's economic growth prospects, as group finance director Spencer Wreford explained to Proactive Investors.

"Within the German staffing market there is a large element of structural growth to come. Germany is 90% of the Continental European business. The German staffing market was only deregulated in 2004, which means temporary staffing is still a relatively emerging sector within the German economy.

"We've seen a strong growth in Germany but there is more to come. In the UK, penetration of temp workers is about 4%; in Germany it is about 2%."

In Latin America, the group is already represented in Mexico and Chile, and it is eyeing Peru and Colombia. All four countries are members of the Pacific Alliance, a free trade zone with strong links to the US, so the growth prospects are enticing.

Wreford acknowledges that the fortunes of staffing companies are very much correlated to the strength of the economies in which they operate, but the recruitment sector is set to outperform in most, if not all, of Empresaria's carefully cherry-picked regions.

According to recruitment industry body Staffing Industry Analysts, the recruitment sector is set for 7% growth in the UK, 9% growth in Japan and Germany, and 2% growth in Australia.

"The staffing sector is expected to grow more strongly than the GDP figures in these markets," Wreford notes.

As for the sectors in which Empresaria operates, almost three-quarters of net fee income comes from the big three: Technical & Industrial; IT, Digital & Design; and Financial.

Management anticipates deepening its presence in these sectors, and as per the company's strategy, this could be through organic growth, bolt-on acquisitions or a mix of both.

Regarding acquisitions, Kreulen and Wreford acknowledge that integrating new companies into the group is a tricky task, but they are happy with how things have gone with last year's two acquisitions: BW&P, in Dubai, and Ball and Hoolahan in the UK.

The pair believe that the group's philosophy of giving the brands a lot of independence, and encouraging staff to hold a stake in the group, will keep the entrepreneurial flame alive in any companies it acquires, while it will also engage the loyalty of the group's own talent pool.

"It's 100% a people business. If you have a lot of attrition, it is not helping the group," Kreulen says. "We have a high level of commitment through the equity ownership model."

Wreford adds: "We get contacted by a lot of brokers that are offering relatively small businesses, with an MD [managing director] that expects to get paid top whack for a small business that he wants to exit immediately and get paid 100% upfront.

"Those businesses aren't of interest to us.

"We want to invest in businesses that are not for sale, where the management team want to stay on, but see they can make more money for themselves but also build a better business by being part of the group."

In 2015 the focus will remain on driving towards three key performance indicators (KPI) the group has targeted over a five year period.

The KPIs are: (largely organic) average growth in NFI of 10% a year; improving the conversion ratio (translation of gross profit to net profit); and reducing the debt to (trade receivables) debtors ratio down to 25%.

"We believe we made good progress along these lines in 2014," Wreford says.

It is hard to argue with that assessment. Net fee income rose 5% to £44.6mln in 2014 from £42.6mln, but would have been up 11% in constant currency terms. The conversion ratio improved to 14.7% from 14.2%, while the debt to debtors ratio is down to about 32%.

Adjusted profit before tax climbed 13%, or 22% stripping out currency fluctuations, to £6.1mln from £5.4mln and, as mentioned, the divi was doubled to 0.7p.

Adjusted earnings per share (EPS) jumped 29% to 8.0p from 6.2p, which means that at its current price of 57.17p, the stock trades on a price/earnings ratio (PER) of just 7.15. For those of you who are big on PEG (price/earnings to growth) ratios, that is an eye-catching 0.2; a value of less than 1 is usually regarded as the sign of an undervalued company.

This year's EPS is projected by the City to rise to 8.85p, giving a forward PER of 6.4. Compare that to the likes of Staffline (projected PER of 11.8), Michael Page (27.0) and Hays (22.1), and the shares look absurdly cheap.

As CEO Kreulen says, "It's a great time to join the ride."

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