Peoplein provides staffing, business and operational services across Australia including workforce management, recruiting, onboarding, contracting, rostering, timesheet management, payroll, and workplace health and safety. More specifically it predominately provides contract labour to its clients across three key verticals: healthcare and community, professional services, and industrial & specialist services. It employs more than 850 team members who have helped to provide employment to over 34,500 people from a candidate pool more than 55,000 people and 4,200 client businesses.
Long-time readers of the Hurdle Rate Substack would recognise this business from a One Page Stock Pitch I did back in February. At the time the business was more than double the current price. In the time since then the business concluded its strategic review with the conclusion to continue to pursue it’s current strategy and Declan Sherman, the group’s founder and head of acquisitions had stepped down from the company (It is notable that Declan did own some ~7% of the company up until FY2022 where he transferred out 4m shares to an unknown holder. He remains a shareholder in some 2.1m shares or 2.32% of the outstanding shares. Other shareholders of note include Perennial Value Management with 9.24% and QVG Capital with 5.21%. Acquisition vendors Andrew Brosnan and Mark Reiken also both own 6.14% respectively.
Circling back on the stock pitch I did previously, I did discuss the risk of labour hire being a tailwind for the fundamentals of the business from it’s inception in 2015 to date. From August 2014 through to August 2022 the % of labour hire workers working full-time hours increased from 73.9% to 81.2% of all labour hire workers. Looking back at this, I do not think this was a particularly useful statistic to bring to the forefront. Whilst it is true that with more full-time employees in the labour-hire workforce would lead to more billed hours which flow through something like Peoplein, there is much more to it.
Either way, the group generates the vast majority of its revenue through invoicing the firms who are being provided labour, also known as contract hire revenue. There is also a small amount of revenue and profits coming from recruitment in general, being the permanent placement of individuals along with project based managed services. The key variable in the top line growth of the firm is billable hours, much like an accounting or law firm running on a timesheet model as well. This requires an incrementally larger talent pool and utilisation of said talent pool. The group has grown this pool predominately through both acquisition and organic growth in recent years. I feel that in years to come, provided there is no catastrophic change to labour hire, that the group can generate additional revenue through the average wage growth of this pool in addition to any volume growth, making this a somewhat inflation protected revenue stream.
The issue is that the number of businesses seeking labour hire in general would decrease in difficult economic environments given that temp staffing is typically more expensive than permanent. This is certainly the case in recent months with many labour hire companies collapsing due to fierce competition for candidates. This article goes on the discuss that construction, hospitality & retail are showing the greatest signs of distress, which if you refer to the picture above, accounts for some ~44% of the Peoplein business (if we include food services as well). This could very well be what the market is concerned about particularly, but ultimately my uncertainty is quite perplexing with Peoplein as the company themselves appear to be quite optimistic in general, shaking off any looming distress soon.
Across the 3 divisions the billable hours are significantly greater in the industrial division, with it being ~10x the health and community and ~18x the professional services hours. However, the rate and margin at which the latter are realised at significantly greater rates with revenue and EBITDA per billable hour in Industrial & Specialist being $43.63 & $2.10, Health & community being $71.71 & $4.60, and Professional Services being $151.27 & $13.60. Therefore, the areas where Australia are seeing the most impact, also happen to be the lowest rate and margin parts of the Peoplein business.
Same Job, Same Pay laws are also prevalent in labour hire, however, predominately in mining, where there is mass exploitation of contract labour at rates below those of permanent staffing, despite having entitlements to boot including permanency. However, as can be read in this article areas including professional services and carers are typically paid greater rates through an agency than not, therefore is likely to avoid most regulatory drama around labour loop holes and the pending fair work legislation.
All of this points me towards thinking that the share price decline in Peoplein ‘feels’ overdone. And I know that is a dangerous feeling to have, so I am thinking about this very carefully and have sized this accordingly given my uncertainty. In a best-case scenario, Peoplein sees no real impact, we benefit from a ~13% dividend yield, high teens growth rates in earnings per share and quite a hockey stick in the valuation multiple. I struggle to see much downside, although put a gun to my head and I could envision significant impairments in its food business, losing some ~30% of its profits perhaps and being valued at a high single digit multiple of earnings with perhaps struggles to grow soon. The group has historically grown roughly half/half through organic/inorganic. It would be good to see further focus on resilient areas of labour demand such as the PALM scheme, the FIP business and Halcyon Knight business which all see tailwinds or structural shortage in labour.
Tikr shows a steadily increasing share count, I haven't looked into it but that seems worrying?