Stock Spotlight: People Infrastructure (PPE.ASX)

Ron Shamgar, Head of Australian Equities and Portfolio Manager of the Small Cap Income and All Cap portfolios, examines one of his favourite holdings. A stock which he believes has strong tailwinds and is likely to be in an even better position following the election. This week we take a look at company held in both the TAMIM Small Cap Income and the All Cap portfolios. We believe this stock offers a substantial growth opportunity and should benefit from the proposed increase in health sector funding if a Labor government gets elected later this month.

People Infrastructure (PPE.ASX) is a workforce management company operating across Health, IT, social care and general labour hire. PPE’s strategy is to drive growth via acquisitions and has continued to outperform since listing. 

Nearly 50% of PPE’s revenue is derived from the health and social services sector and another 35% from general labour hire. IT services comprise another 10% of their revenue. Important to note is the fact that the health care market is a $2.65B sector and is forecast to grow at 5% p.a.. The labour hire division is benefiting from civil infrastructure and mining project spending. We don’t foresee any impediments to these tailwinds in the immediate future.

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Source: Company filings

PPE listed eighteen months ago and has grown revenue from $192M in FY17 to a FY19 forecast of $280M. During that period EBITDA has almost doubled from $10M to a $19M forecast for this year. This growth, achieved partly through acquisitions and organic initiatives, and has made PPE the largest nursing agency in Sydney and the largest workforce manager in the disability sector nationally. The company is led by Managing Director Declan Sherman who, as the largest shareholder, owns 12.5% of the company.

Source: Company filings

PPE has made four acquisitions since listing and they have indicated that they intend to continue to consolidate the sector. During March this year PPE acquired Victorian Nurse Specialists, a leading nursing agency in Melbourne, for $2.5M. In addition, PPE acquired the remaining part of Recon Solutions and Project Partners for $2.8M. Both deals will contribute an additional $1.1M EBITDA.

PPE is currently forecast to earn 19 cents cash EPS for FY19. The business generates strong cash flows and is not capital intensive. This allows management to pay dividends and reinvest into further acquisitions with the addition of debt. The balance sheet has ample capacity to borrow for any further deals should that be deemed necessary. The dividend yield this year is forecast at 9 cents or a 3.6% fully franked yield. We estimate earnings will grow at ~15% p.a. over the next couple of years with the company generating ROE in the low 30% range. Earnings growth could accelerate if larger deals are done. So far PPE have been prudent in their acquisition approach.

With Labor currently the favourite to get elected this month (Sportsbet currently has them paying $1.30 against $3.50 for the Coalition) we see further tailwinds with the proposed increase in funding for the healthcare sector and female dominated professional roles such as nursing. As the leading provider to the health sector work force, PPE should benefit.

We value PPE in excess of $3.00 per share. Key catalysts for this year are further acquisitions flagged by management, August results beating analyst estimates and further market awareness as the market cap increases to over $150M.