| 2006 | 2007 | ||||||
| Price: | 3.76 | EPS | |||||
| Shares Out. (in M): | 0 | P/E | |||||
| Market Cap (in $M): | 60 | P/FCF | |||||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 0 | TEV/EBIT | |||||
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There are a number of relatively high probability events that could have the stock more than double and very few shoes that could drop to sink the equity more than 10% from current levels.
Heffer504 did a good job writing up the idea a year ago, however we believe much has changed which is not yet reflected in the operating numbers but that should change very shortly. We think the downside is $3.40 and upside $8.50+.
Catalysts: WSTF $3.76
a) CEO bought 25,000 shares over the last month at $3.84 per share.
b) .34-.40 in EPS for 4Q06 (October year end)
c) Book value should be $4.10-4.20 a share
d) Necessary adjustments to business have been made which should lead to EBIT margin expansion of 60-210 bps in 2007 which should translate to 160-310 bps EBIT margin and EBITDA per share range of .67- $1.45.
e) Extraordinarily low ev/sls of 9%
f) Hidden assets: Potential sale of non-core AU/NZ business could leave an EV of $20-40mn and EBITDA of $15-19mn
g) Masking of underlying operating improvements due to ramp in permanent placement head count.
h)
We think if the stars align (sale of AU/NZ and achieve a 2.5% EBIT margin) that the company could be trading at 2x EV/EBITDA on 2007 and using our downside scenario of EBITDA with a 5x multiple gets us the current share price. The downside target represents using 50% of the peer group EV/EBITDA multiple and should put the company at about 80% of book.
Private market comp Remedy Temp (REMX) was acquired by privately held Select in May 2006 at .27 of EV/Sales, 22x EV/EBITDA, and 2.7x P/Book which would imply a value for WSTF of $9.64-10 (left out the EV/EBITDA multiple in the comp) or 150% of current valuation.
WSTF sold Scandinavian operations for 25% of sales in 2005.
Margin improvements for the next 12 months:
- Increased permanent placement business with higher margins versus temp staffing core business. WSTF has been ramping up their domestic perm placement recruiters (currently at ~35, up from 13 at end of FY’05, we assume it will ramp up to ~42 at end of FY’07), each perm placement recruiter has revenue goals of about $12K a month. This ramp up should result in domestic perm placement sales of ~$8MM by end FY’07. Operating margins on PP are substantial, we estimate around 20%+ given the ability to leverage existing office and infrastructure. This shift to perm placement results in 20-50 bps margin improvement.
- Headcount reduction taken at the end of last quarter (30 people), going forward savings of $2MM. Partially offset by additional hiring of permanent staffing recruiters. This hasn’t shown up in the figures yet due to severance costs however it has already been implemented. Resulting in 15-30bps
- Additional cost-saving measures taken at the beginning of 3rd quarter (reduction in headcount at headquarters), going forward savings of $1.2MM. Resulting in 10-20bps.
- The industry has experienced positive pricing increases and WSTF has already increased bill rates by 2.9% in last quarter. These higher bill rates should result in 0-50bps improvement going forward.
- WSTF is currently upgrading their information management system (Peoplesoft system) and therefore experiencing abnormally high capex. Capex should normalize starting mid-2007 from ~$6-7MM to ~$4-5MM rolling basis. Resulting in 5-20bps
- Low margin legacy contracts expiring in the next few months (WSTF signed these deals in 2002-2003 when they needed to fill capacity at below market margins). These will be renegotiated at higher margins, more in line with industry averages (from 12%GM to 18%). Resulting in 10-20bps
- Potential improvement in foreign operation margins.
Current operation margin is ~1%
|
2007 EBIT |
||
|
Operating Margin |
per share |
EV/EBIT |
|
1.0% |
$ 0.39 |
9.2 |
|
1.5% |
$ 0.58 |
6.2 |
|
2.0% |
$ 0.78 |
4.6 |
|
2.5% |
$ 0.97 |
3.7 |
|
3.0% |
$ 1.16 |
3.1 |
The entire point of the investment thesis in the above chart is using today’s $60mn EV, which should be very different by year end 2007 due to cash generation from the business and potential sale of AU/NZ. If both events were to occur, investors would be left with a company that has book of $5+ and a range of EBITDA per share from .67-$1.45 per share. Using the low end of our expectations a 5x multiple would leave a $3.70 share price and a $4.50+ book value in a year. So we feel there is relatively little downside. Using mid case 7x multiple off $1.06 a share (2% ebit margin) gets to $7.50 and finally upside of 7x multiple off 3% EBIT margin gets you to $10.15 a share. All cases assume no sale of AU/NZ, which could provide additional upside. The 7x multiple off EBITDA should be conservative, well less than public comps of 11.8, REMX take out at 22x, and in line with Labor Ready take out of CLP 7x EV/EBITDA.
Potential
From our discussions it appears AU/NZ is a non-core area of focus given the distance, issues, and WSTF’s current focus on getting US/UK right. From this perspective we would not be surprised to see the sale of the AU/NZ operation that currently runs about $90mn in annual revenue.
Here is what Westaff would get upon the sale of the AU/NZ operation at different sales multiples:
|
|
Cash |
|
|
|
|
|
Percentage of Sales |
Raised (MM) |
EV (MM) |
EV/Sales |
EV/EBIT |
EV/EBITDA |
|
10% |
$ 9.3 |
$ 50.1 |
0.09 |
8.3 |
4.6 |
|
15% |
$ 13.9 |
$ 45.4 |
0.09 |
7.6 |
4.2 |
|
20% |
$ 18.6 |
$ 40.8 |
0.08 |
6.8 |
3.8 |
|
25% |
$ 23.2 |
$ 36.1 |
0.07 |
6.0 |
3.3 |
|
30% |
$ 27.9 |
$ 31.5 |
0.06 |
5.3 |
2.9 |
Assuming .40 per share 4Q06 book would go to $4.20 +/-
Sale of AU/NZ would range from value of .50-$1.50 per share which would take book after 4Q06 to range of $4.70-5.70 per share, company has $17mn in deferred tax assets that should shelter taxes. Not sure if the company can utilize this in sale of business, if not should add .33-.97 per share after tax.
Rapid growth in permanent placement business: Current CEO successfully improved margins in
P/BV EV (MM) EV/Sales EV/EBIT EV/EBITDA 6.4 $ 15,259 0.78 21.8 18.9 2.6 $ 180 0.73 8.9 8.4 2.6 $ 149 0.29 80.2 22.2 2.5 $ 700 0.52 6.8 6.1 2.3 $ 5,523 0.33 11.4 9.6 1.9 $ 257 0.18 33.0 10.0 1.4 $ 977 0.18 13.4 8.5 1.0 $ 395 0.21 11.7 7.1 Comforce Corp. NM $ 147 0.26 9.5 7.7 2.4 $ 395 0.29 11.7 8.5 1.0 $ 59 0.10 10.5 5.7 Westaff (2007) 0.8 $ 50 0.08 5.3 3.5 AU/NZ Sale (20% of Rev) Westaff (AU/NZ Sale -LTM) 0.8 $ 41 0.08 6.8 3.8 Westaff (AU/NZ Sale -2007) 0.7 $ 33 0.06 4.3 2.7 Comparable Price Westaff (LTM) $9.17 $11.54 $4.20 $5.69 Westaff (2007) $11.11 $14.28 $8.32 $9.20
Company
Adecco SA
Barrett Business Services
Remedytemp Inc.
Labor Ready Inc.
Manpower Inc.
Hudson Highland Group Inc.
Kelly Services Inc.
Spherion Corp.
Median
Westaff (LTM)
CEO has purchased:
7,500 @ 3.88 Aug 23, 2006
10,900 @ 3.90 August 24, 2006
6,600 @ 3.67 September 11, 2006
Former CFO has been replaced with much better CFO John Sanders. We have dealt with Sanders over the last 6 months and he is sharp, responsive, with significant WSTF field experience.
Drivers for a strategic buyer:
- low valuation
- M&A rampant in the staffing market
- buyer can leverage use of branch network
- SBOX cost savings
- Stover Foundation is a big holder (85 year old founder)
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