Gattaca Share Price (GATC)

The results for the six-months to January are robust against a backdrop of declining confidence in both clients and candidates generally. With an improvement in the contract book during early Q3 we think this highlights that the tide is starting to turn and likely to feed through to demand for permanent hires ahead of the CY24 end. With net cash accounting for over 70% of the current market capitalisation, the operating business appears undervalued.

H1 results were broadly in line with expectations, as declining economic confidence reduced NFI by 12.8% yoy, with the UK down 10%. The decline in perm activity was largely responsible for the shortfall, with contract activity remaining robust during the period. Adjusted PBT improved modestly and adj. EPS was unchanged yoy at 1.6p.

Costs have reduced further, although Management continues to add headcount in its core areas of focus and strength. Also several new contracts/renewals were awarded during the period: these are likely to benefit H2 onwards and reflect a resurgent Business Development team.

We have taken a more conservative view of the outlook, reducing FY24 estimates in line with new guidance, albeit still anticipating meaningful growth in activity levels. The operating business excluding the net cash is valued at just £10.5m which seems too low given our EBIT forecasts. As such, we set a fair value of 140p / share.

Link to research report: https://www.equitydevelopment.co.uk/research/trading-report-in-line-with-sector-peers

Obviously a challenging market but looking at the big picture, management have managed to turn around years of heavy loss making. Balance sheet is strong. This is already at bargain basement valuation and is an easy hold for the ongoing recovery. Technical uptrend too. Trendz

Queue the equity development fair valuations. Glad I took advantage of yesterday's pump (aka manipulation) to dump half of my holding at 122p. These fair valuations spouted for years by these pen pushers are meaningless.

As I have said before the prices for GATC as long as it stays above 95p are 114, 125, 152

We are encouraged by several aspects of the pre-close trading update covering H1, not least the outcome and movement in net cash. A renewed focus on the cost base should result in improving conversion rates, offsetting any further shortfall in fee income during H2. We also remain confident that a recovery in Gattaca’s markets should emerge during Q4 ‘24/early FY25 supporting a further re-rating of its shares.

The yoy shortfall in NFI of 16% during H1 includes a large RPO contract which ended in September. The H2 ‘23/H1 ’24 comparison is as a result more favourable, with the larger contract included for just two months of the former period, with fee income down 8.6%. Overall, contract NFI was more stable, declining 6% yoy, compared to 38% in perm.

H2 ’24 onwards will witness a greater focus on productivity, resulting in outgoing sales heads in the business not being replaced and further room for cost cutting within perm focused employees. Over the medium term, we expect administration headcount as a proportion of total heads to move towards best industry practice of c.25%, down from the current 32%.

Should we be proved correct on expecting a recovery in the Group’s markets then the current valuation appears too low. Based on a DCF model we retain our fair value / share at 175p.

New research report here: https://www.equitydevelopment.co.uk/research/profit-expectations-maintained

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