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Acknowledging biases before I look into $APM
Before I launch into an analysis of $APM, I wanted to explain the key biases I need to avoid in looking at this company:
1. The stock is down 20% YTD = Buy the dip
2. The IPO was pumped = Management must be misleading
3. Leverage means a capital raise = Avoid for now
So as I set off, I wanted to explain what factors I want to dispel from $APM
Background to $APM – Key things to know about their brands & funding
$APM provides employment, health and well-being, and disability and aged care support on behalf of the government and private sector
It now operates in 11 countries - Australia, Canada, Germany, New Zealand, Singapore, South Korea, Spain, Switzerland, Sweden, United Kingdom and the USA
$APM in a way is a roll-up, so they do own a lot of brands, however, the ones I focus on are
Ingeus - UK brand (noting this was Therese Rein's business so has decent Aus exposure)
WCG International & Equus- North American brand
In terms of the main governmental programs for employment, there is:
Australia - NESM (previously Jobsave)
UK - Various - notably CAEHRS & Newstart
US - Various- notably WorkBC, Ontario Employment Services, Federal contracts
Taking the team members/location with a grain of salt, below is a sense of their size in each country
Key drivers for the business from here
At the current juncture, I see the biggest driver $APM, you have to fundamentally be confident in the following drivers:
Growing the Equus acquisition: Not only do they need to get their gearing down (>2.4x Debt/EBITDA, above their desired level of <2x), there is also a communicated desire to manage opex which has increased materially with recent acquisitions/NDIS contract wins
More on De-leveraging: In FY24, I imagine the cash flow to look a little like this: As such - I do not see a rapid de-leveraging without reducing the dividend payment and their 50% D/EV is too high
$300m OpCF
Less: $60m on debt servicing
Less: $80m on capex (noting some compulsory cash payments for Everyday)
Less: $100m on dividend
Offshore success is a crucial part of their thesis
57% of revenues come from outside Australia with North America being the most important geography post Equus purchase (closely followed by UK)
When I look at the US earnings there is a mix of factors
US margins are above trend due to more performance based contracts (this will unwind as fixed fee & fee for service are increasingly their fee model)
Traction in Canada is strong; BC contract extension to 2027 and the progress with Ontario & Ottawa
Whilst early performance is fine, the Equus acquisition did not come cheap (c. 21x NPAT and 5x EBITDA) and the successful integration of this business is the only thing that matters right now
Quality Control for their services: They continue to be a meaningful player in Australian employment with few below-average ratings relative to their size - in particular, compared to Maximus
Specifically what I mean here is:
There is nothing to suggest $APM will lose their edge in Australia
Using their strong ratings, $APM will see DES quickly to contribute to bottom-line (vs. WFA)
If competitors like Max improves the rating of their sites it could reduce their edge but it is not an issue for now
Contract wins matter, cash conversion is a rouse In their reporting, management dwell on cash conversion, however, the bigger business driver is contract run-off because most of these gov contracts have good cash cycles. Whilst $APM would often be in place to win re-tenders, there are examples in each country where these programs expire
AUS
DES was extended to 2025
UK
CAEHRS runs off in Oct'25 (anticipated value GBP 350m)
Restart runs off in Jun'26 (anticipated value TBC)
US
Work BC extended to 2027
Individual contracts are one-off (e.g. RSVAP contract win in 2021)
Reducing direct exposure to NDIS: The ANZ business growth rate was conflated from high single digits to high teens due to NDIS. Given the well-publicised budget cuts needed within NDIS; I think a lower revenue growth rate should be applied for
Mature growth rates are likely from here: Bizarrely, I consider 2020 (peak COVID) to be a fairly reasonable year to benchmark because: So whilst this business is clumpy, I would say that c.9% EBIT margins are more reasonable
2021-2022 were buoyed significantly by NDIS growth and some big contractural wins
2023 - This is less meaningful given the acquisition of Equus M&A
Valuation comps are difficult: I find it difficult to truly consider a valuation comparable for this business because
Most of government-backed ASX businesses are not comparable ($KEL, $GEM) or bought out ($EHE)
Most of the international labour businesses are typical recruitment businesses (e.g. Hays/Capita/Robert Walters) which have 3-4% EBIT margins but significantly more stable earnings profiles
This means that the only meaningful comparable is Maximus which has had a mixed performance over the last 5 years
So as you can see; $MMS' shareholder returns are not very compelling (even including dividends) despite being ahead of other comparables.
Now there are 2-3 things that make $APM more appealing than $MMS:
Generally, its Australian stores have a better rating than Maximus'
Linked to the better ratings, $APM has experienced higher case load growth
It is trading on a much smaller multiple (9x vs. 18x Forward NPAT)
Conclusion:
Valuation today is great: the earnings multiple for $APM is optically low at 9x forward earnings. Furthermore, it is a better business than a typical recruiter (e.g. Hays or indeed $PPE) and no it does not make sense for it to be trading a half the multiple of $MMS. However, I would attribute these multiple differences as follows: Yes if I were a short-term trader (& considered Megan Wynne's buying as a signal); there is a case to buy here.
70% of this is due to the business over-earning (US Margin/NDIS Glut)
30% upside to a short-term trader
Prospects longer term are less great: I do not want to buy the dip here because
I do not know the longer-term prospects of Equus yet and it was an important deal ($250m acquisition for $700m company)
$MMS (Maximus) has performed only mildly well over a 5yr time frame (and indeed the longer term) and I consider this the only true global comparable
Fundraise is not a given but debt limits options: The level of debt which $APM is an issue for me. Not because they cannot service it but more because they have no M&A optionality without doing a fundraiser
Overall, I think a short-term trader could make money out of multiple reversion. I do not think it is right for longer-term investors given structurally this industry is clumpy & requires roll-ups. $MMS their only true comparable has mixed longer-term success, Equus' success is not yet known and debt levels provide limited optionality.
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