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HRnetGroup Bought a 25% Stake in Staffline. Is It a Good Bet?

HRnetGroup Ltd (SGX: CHZ) announced it bought a 25.4% stake in UK-listed staffing company Staffline Group PLC. Based on current market prices, HRnetGroup’s stake in Staffline is worth around 27.1 million British pounds, or S$45.5.million.

Here are some things investors should know about Staffline.

What it does

Staffline is the United Kingdom’s leading outsourced workforce provider, working on-site at the client’s premises. It was established in 1986 and works with major companies such as supermarket chains Tesco and Sainsbury as well as fashion names such as Boohoo, Marks and Spencer, and Missguided. Staffline provides its clients with flexible staffing requirements.

Staffline also has another business segment called PeoplePlus, which helps unemployed people find work by providing skills training, apprenticeship programs, and support.

Tough times

Staffline has not fared so well in recent years. Its shares have fallen off a cliff, from an all-time high of around 16.11 pounds in 2015 to its current share price of just 1.57 pounds. 

Needless to say, Staffline has been facing major challenges in recent years.

The recruitment firm was in the spotlight for the wrong reasons in 2018, when it was revealed that the company had underpaid its workers, which would result in a fine and remediation costs.

In 2018, its net debt also advanced to 63 million pounds from 16.5 million pounds in 2017. Its high debt puts it in a difficult position, resulting in the need to raise funds just to stay afloat. 

Its weak liquidity position was the result of the overly-aggressive deployment of cash to make acquisitions, increased working capital requirements, and the remediation costs mentioned above.

HRnetGroup got a good price

Staffline’s poor financial position left it no choice but to issue new shares through a placement and an open offer. It raised around 41 million pounds last week, which it will use to pay off debt. 

The fact that the group had to raise funds after such a steep fall in its share price will surely irk existing shareholders. However, this is good news for opportunistic investors who were placed shares or purchased shares in the open offer. HRnetGroup was able to pounce on this opportunity to pick up shares for 1 pound per share at that time.

The reasons for the purchase

I had a quick chat with HRnetGroup regarding its stake in Staffline. Here are some of the things the company’s leaders highlighted:

  • Staffline did not intentionally underpay its workers. It was fined because Staffline paid staff for actual “working hours” even though, according to the UK working laws, workers also had to be compensated from the time they were told to arrive. Staffline’s other competitors in the staffing business are facing similar investigations now, and it seems to be an industry-wide mistake.
  • Staffline’s weak financial position was because of unforeseen circumstances, including the fine and remediation fees.
  • Staffline has positioned itself as the largest prison education service provider in the UK. It has won a 140 million-pound contract to be awarded over the next three years that will provide it with visible income.
  • With the challenges and fines behind it, Staffline has forecast 25 million pounds in EBITDA in 2019.
  • HRnetGroup sees potential synergies between itself and Staffline. For one, HRnetGroup could potentially leverage Staffline’s tech platform, which is used to deploy staff and onboards candidates using a bot.
  • HRnetGroup could also provide permanent placement services expertise, which Staffline does not have at the moment.

A Fool’s take

HRnetGroup’s stake in Staffline is relatively small compared to the overall size of HRnetGroup’s business. However, the potential synergies between the two companies could benefit HRnetGroup over the long term. It also looks like a relatively low-risk bet as HRnetGroup managed to secure part of its stake through the open offer, which was priced well below current market prices.

All things considered, despite the challenges that Staffline has faced in recent years, HRnetGroup’s acquisition of a 25% stake in Staffline looks like a relatively low-risk but potentially high-reward bet.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of HRnetGroup Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in HRnetGroup Ltd.