Impellam (IPEL): Flatlining

I discussed Impellam last year and found them rather perplexing as a group. I can't see any reason for them to trade at the value they're sitting at, and, even if you dislike recruiters (which is probably a fair bias) I couldn't see why they weren't at least trading in line with other similar companies. My perplexion has not been answered or changed - they actually trade at slightly less than last time, though only marginally. So what's changed since I first looked at them?

From then to now

Well, two big things. Firstly, Cheryl Jones, Chairman (they don't have a CEO), stepped down. It seems rather sudden, and the company is doing what it always seems to do and not giving a great deal away - just saying that she's leaving "following the successful turnaround and transformational restructuring of the Group". Kind words, and probably fair ones, but still a little strange. In hindsight, I wonder whether investors are skeptical of the corporate governance issues of having such a small group of directors and a combined CEO/Chairman; that hasn't changed since her departure.

Secondly, though, we've had the trading update and Impellam's expectations for the year, along with an interesting announcement. The announcement first, and the group said that the Board is considering a "one off special dividend of not less than £15.0 million following release of the preliminary statement in February". The dividend is a few million already, so we're looking at the group returning about 13-14% of its current market cap in cash to shareholders. They've already been buying up shares and have continued to be cash generative, with a small amount of debt. 

The expectations for the year are pretty reasonable, too - £3m less in operating profit than last year (£36.7m pre-exceptional 2011) puts us about £34m, and they say share options charges and restructuring costs will add a £5.5m bill on top of that. Post exceptional profit should come in, if they're accurate, at about £28m, then. Deduct net finance costs and tax and you're looking at maybe £20-24m net profit for the full year, putting them on a forward P/E of about 7.  And that's post exceptional, though I don't think share option charges are actually 'exceptional' at all (particularly given Impellam were talking about issuing more), so it's highly dependent on how much of that £5.5m chunk is options and how much is 'restructuring'. Frankly, I'm not convinced restructuring is ever really 'exceptional' either - companies have to constantly restructure. It seems highly down to personal interpretation!

Still, they're making good money. The bigger question is whether they'll continue to do so.

Abnormal returns

As with a lot of the recruiters, Impellam (LON:IPEL) earn very strong returns on capital. I'm not entirely sure why this is - I postulated before it might have something to do with the fact that margins are already so slim. More likely it's an error in my methodology or the up point in a long term cycle that'll deteriorate over time. Either way, I don't see why any of the recruiters I've looked at have a sustainable competitive advantage in a field that is basically only driven by results - getting the right people in the right place for a good price.

It seems likely over the medium term returns will deteriorate. Perhaps they already are, and we are seeing the start of it this year with Impellam talking about softening conditions. As ever, we can basically distill the valuation of the business down to what we expect returns to be. If we expect a maintenance of their current levels (as seen in the last couple of years, which have been significantly higher than the years before) it is rather undervalued. If we expect a slight pullback, it is probably still a little undervalued. If we expect a more sizable tug - back to the levels seen in '08/'09, for instance, we're looking at an overvalued company. The leased assets act as the 'leverage' in the three scenarios - while the company doesn't have a great deal of balance sheet debt, these are its obligations.

These are no-growth scenarios, but I think expecting growth in a market like recruitment is hopeful. Given how competitive it all is, it strikes me as essentially coming down to who has the better management team, company strategy and so on. It's a capitalistic scenario, and I have no particularly to think Impellam will thrive given their revenues are basically flat on the last 3 years, soon to be 4 years given they expect revenue to be slightly down next year.

Looks like we're stepping into mature phase, then, given increased cash returns to shareholders. I suspect it's a little undervalued, but maybe not as much as I thought at first glance. I'll mull it over some more.