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PeopleIN Undervalued, Brokers Find

Small Caps | Feb 22 2023

This story features PEOPLEIN LIMITED. For more info SHARE ANALYSIS: PPE

Demand for PeopleIN's services remains strong, with diversification allowing the company to benefit from sector strength moving forward, but investors are not buying it.

-Diversification proves positive for PeopleIn, allowing the company to offset single sector weakness with better conditions elsewhere in the market
-Improved diversity supports a more consistent earnings trajectory for the company 
-The company reported 12% underlying earnings growth

By Danielle Austin

Recruitment and staffing company PeopleIN ((PPE)) showcased the value in its diversification strategy over the six months to December, with strength in its health and industrial segments offsetting isolated weakness in technology.

The company is reporting a more consistent earnings trajectory, according to Ord Minnett (Buy, target price $4.39), for having improved diversity by sector, customer type and region. 

PeopleIN is a talent solutions and HR outsourcing services provider whose main activities comprise contract hire and permanent recruitment across a range of sectors, including health & community care, technology, accounting & finance, government, food services, early learning, resources & renewables, hospitality & retail, construction and manufacturing.

While job vacancy levels have declined from a peak in late 2022, the company continues to benefit from above historical average demand which should support the near-term outlook. 

Pointing to the company’s reported organic growth as a key feature of the result, Ord Minnett likes PeopleIN’s proven track record of acquiring within growth industries and extracting organic growth from purchases.

Within the half, the company benefited from a strong performance from its recent acquisitions Food Industry People (FIP) and Perigon. Food Industry People in particular looks on track to deliver full year earnings 10% above the initially targeted $9.5m, as announced at the time of acquisition. 

While Ord Minnett remains at the top end of PeopleIN’s full year earnings guidance range, the broker did lower its earnings per share forecasts -5% given three profit and loss items that missed its expectations. The broker anticipates management continues to drive deeper competitive advantage from existing verticals, and finds shares are currently offering a compelling entry point.

Multiple sector growth supports a top end guidance range result 

PeopleIN beat Morgans’ forecasts at both the earnings (up 50% year-on-year, 5.2% beat to the broker) and net profit (up 49% year-on-year, 6.8% beat to the broker) lines. The interim result also beat on sales, but the broker (Add, target price $4.90) attributed this to the recently acquired, and lower margin, businesses. 

This broker highlighted a reiteration of a 10% per annum long-run organic growth rate target and a 7.0% earnings margin target suggest some confidence in a runway of earnings growth. Morgans lifted its earnings forecasts 5.4% and 6.3% for FY23 and FY24 respectively on the back of the strong performance, expecting PeopleIN can deliver at the top end of its guidance range in the current fiscal year.

Despite describing the company’s result as “complex”, Wilsons (Overweight, target price $4.77) did find the half to validate PeopleIN’s diversified model. This broker highlighted ongoing significant staff shortages across the company’s core sectors of healthcare, professional services and industrials, which obviously represents headwinds for further growth.

Much like Ord Minnett, Wilsons finds PeopleIN to be trading at a material discount to intrinsic valuation, even when pricing in substantially worse employment conditions over the medium term than those likely to emerge.

Moelis (Buy, target price $4.18) and Petra Capital (Buy, target price $5.20) both echoed other broker’s in expecting PeopleIN to achieve the upper end of its FY23 guidance range. The former pointed out some macro risk exists to the company’s outlook in FY24, but it does expect these can be offset by factors including diversified sector exposure.

The latter, meanwhile, expects ongoing recovery in the nursing sector, alongside improving immigration, to be a key driver in the second half and into the next fiscal year. 

The shares are today trading slightly up in an overall down market. But at around $3.18 the share price remains well below target prices set by the respective brokers mentioned.

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