A well run small cap flying under the radar

People Infrastructure (PPE) has featured in the NAOS portfolios since its IPO in 2017. But following an outstanding result for FY20, our view is has improved even further. While we were expecting a solid outcome, the result was better than we anticipated, not only at the earnings level, but also their cashflow and balance sheet results. As a result, the company is now a 7% position in the NAOS Ex-50 Opportunities Company (ASX: NAC) portfolio.

PPE provides staffing solutions, so naturally it saw significant disruptions from COVID shutdowns. But the sectors the company operates in have shown more resilience than expected, and hours worked have already returned to pre-COVID levels.

In this note, I explain why we were attracted to the company, the key points of the recent result, and provide our view on the company following the earnings update.

Why we love it

Initially we were attracted to the business by the MD, Declan Sherman who we knew previously and held in very high regard. PPE is a specialist in staffing solutions which, as an industry has a mixed track record in a listed environment. However, we believe PPE are unique. While they started out as a staffing business, they have since been able to expand into business and operational services, which we believe will be the source of a lot of their future growth. In healthcare for example, they provide a full suite of HR-related services including staff training, rostering, payroll and HR advice.

In our view, the other areas setting PPE apart are the growing verticals they operate in, particularly healthcare and IT, as well as the integration they have with their clients in the disability sector.

Growth in the staffing and workforce management industry is being driven by workforce demand for more flexibility in working hours as well as employers becoming more sophisticated around the management of their staff. This is particularly the case in IT, where technology has allowed a lot of projects to be done remotely and on an ad-hoc basis.

The business has consistently proven itself operationally. They have been stress tested through the pandemic, yet it currently trades on approximately 10x our estimate of FY21 earnings. Management are heavily invested in the company and it has a strong balance sheet that can help them grow via acquisition.

What we learned from this week's result

Management had flagged that the business would see some level of disruption from COVID. But the good news was that the company is now above pre-COVID volumes for “hours worked”. The sectors they operate in have shown a greater level of resilience than we had expected. The key highlight from the result was the strong level of cashflow the company produced, even when normalising for the benefits of government stimulus.

At NAOS, we strongly believe that cash is king when analysing a business.

Over the last three years PPE has produced over $44m in cumulative operating cashflow and due to the low capital expenditure requirements, around $42m in free cashflow to shareholders. At time of writing, this equal to almost 20% of their market value.

The two key surprises were how quickly the business has bounced back post a nationwide lockdown, as well as the current environment in Victoria for their nursing vertical. Private hospitals have not restricted operations during the second wave to the same degree and their Victorian nursing business has experienced a 17% increase during the second wave and lockdown, versus a 70% decrease in the first wave.

Our view

We have a more positive view of the company following the result. The business is seeing good organic growth in the core business, they have exciting internal growth options and they have integrated their acquisitions well into the core business.

PPE have stated that they have the ability to complete $80-90m in future acquisitions using a combination of cashflow and debt whilst maintaining debt to EBITDA of <1.5x. In our view PPE is too cheap for a business of this quality.

Invest for the long-term

NAOS Asset Management is a specialist fund manager providing genuine long-term, concentrated exposure to Australian Listed Industrial Companies outside of the ASX-50.

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Important Information: This material has been prepared by NAOS Asset Management Limited (ABN 23 107 624 126, AFSL 273529 and is provided for general information purposes only and must not be construed as investment advice. It does not take into account the investment objectives, financial situation or needs of any particular investor. Before making an investment decision, investors should consider obtaining professional investment advice that is tailored to their specific circumstances.

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A specialist fund manager providing genuine, concentrated exposure to Australian Listed Industrial Companies outside of the ASX-50. NAOS maintain a focus on long term capital protection and delivering sustainable growing fully franked dividends.

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