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Cpl Resources plc (CPL:ID) (CPS:LN, sterling quote) (DQ5, its actual ISE/Euronext ticker) is Ireland’s leading recruitment firm – founded 30 years ago by CEO Anne Heraty, it’s been listed since its 1999 IPO. It provides talent & workforce solutions, via 13,000+ recruiters/contractors/temporary staff in 47 offices across 9 countries, focused primarily on Ireland, the UK, and Central & Eastern Europe. It operates via distinct specialist brands in sectors including technology, healthcare, pharmaceutical & life sciences, engineering, light industrial, finance & accounting,  human resources & office administration, and sales. It boasts a broad range of clients from global multinationals to startups to local SMEs, and operates across the full talent spectrum from permanent, contract & temporary recruitment to the provision of managed workforce solutions & strategic talent advisory services.

In its FY-2019 annual report (NB: FY ended Jun-2019), Cpl reported record results & the launch of Covalen, its new managed solutions brand. Revenue increased 8% year-on-year to €565 million, with gross profit (i.e. net fee income) up 16% to €96 million, delivering 30% growth in adjusted operating profit (to €26 million) & exceptional 37% growth in diluted EPS to 77.2 cents a share. This is reflected in an annual dividend up 41% & a balance sheet boasting over €40 million in net cash. Cpl Resources now trades at €7.05 a share…a €193 million market cap, an enterprise value of €153 million & a 9.1 P/E multiple!

Wow…soooo, what’s the catch?!

Well, frankly, there’s none! Cpl’s a high quality company run by a founder-CEO, that boasts impressive revenue/earnings growth over the last 20 years. But still, there’s a chorus of naysayers…so first, in grand Charlie Munger tradition (‘invert, invert, invert!’), let’s hear them out. Starting with:

Cpl Resources

OK, did you wince at the name? Ireland’s famous for its cash incineration machines – i.e. its quixotic junior explorers – so there’s hella burned investors out there who’d run a mile at even a whiff of an Irish resource stock. It’s unfortunate Cpl’s name may attract the kind of punters who’d never actually buy it, but deter investors who might otherwise become loyal shareholders…

And most see recruiters as boom/bust stocks for the ‘too difficult’ tray – they love you in good times, but crucify you at the merest whisper of a downturn. You gotta buy ’em after they collapse…well, unless their underlying business is also collapsing! As for receivables, they may as well be liabilities, given the trouble some firms have had with collections over the years! And what else do they boast: Their real assets head out the door, and all it takes is a few warm bodies, desks & phones for them to start a new firm the next morning. And aren’t recruiters the hand-maidens of some new Coasean dystopia – as journalists, already acutely aware of their own diminishing salary, job & career prospects, will keep reminding us! But who even needs recruiters with the internet & LinkedIn? And software to select the best candidates – per the studies, aptitude, ability & psychometric tests, etc. are far better than interviews! And once the #AIRobots arrive, what jobs are left anyway?

As for Cpl, the CEO (& her husband) still own a 35%+ stake – what activist or bidder would ever target the company without their say-so? And what about this industry consolidation…why wasn’t Cpl snapped up years ago? Why is it even a listed company: Post-IPO, they’ve never raised funds, they barely do any investor relations & their trading volume/free-float sucks! Maybe those Phoenix whingers are right: It’s a nice piggy-bank for Heraty & her husband…the company piles up cash it doesn’t need, they’ve made tens of millions over the years selling shares & enjoy a huge annual dividend, and even own/rent a building back to Cpl!

Whew…still reading? Apologies: Wash off the cold sweat & pour a relaxer. Now, let’s do this properly & hopefully tackle some misconceptions (even the silly ones!) along the way:

Yes, while recruiters may be misunderstood, the sector has its share of bad apples! Perversely, the fault lies in its obvious strength: It’s a capital-light business which offers compelling average/peak returns on investment. That’s tended to attract firms/managers who may lack operating discipline, let alone the resources/skill-set to withstand a downturn. And PE types who see a great roll-up opportunity…’til they wake up with a stretched balance sheet, poorly-integrated acquisitions & little understanding of their underlying business, just as things go pear-shaped. Just like clients & candidates gravitate to recruiters with the best reputations, investors must focus on a recruiter’s long-term record & its management’s reputation…which is the key industry advantage.

And naysayers never stop banging on about an existential technology threat. But computers arrived in the 40s, Microsoft in 1975, the Internet took off in the 90s (as did Monster & CareerBuilder), Google & LinkedIn were startups in 1998 & 2002…and DeepMind became sentient in 2010! Decades of hardware, software, the internet, search & now AI/machine learning have left the staffing sector…in the best shape ever, boasting $0.5 trillion in global revenues!

While Monster sums up the failed potential of online recruiters…after 20+ years, it was sold for barely more than 5% of its peak market cap! And LinkedIn was supposedly another mortal threat…even though recruiters had already embraced it as an invaluable professional networking tool. Just like they embraced PCs/laptops, CRM/database software, the internet & smartphones, social media, messaging, etc. Picture the productivity of today’s recruiter vs. one checking in with their answering service back in 1980?! And AI’s the next threat…to recruiters & ultimately the future of work. But hiring will remain a very human process – as the joke goes:

Of course the hiring process is irrational…’cos people are irrational!

‘Cos we really want to select/interview candidates who may end up working for & with us. Which is a challenging & time-consuming process – the internet itself isn’t much better than a newspaper ad a century ago – and it’s why we need recruiters! Even more so today: HR departments outsourced almost everything, so now the heavy lifting mostly falls on hard-pressed middle managers. Who must outsource the hiring process to recruiters out of sheer necessity. And because recruiters boast networks & databases to screen, access & interview a far superior selection of candidates, and will (ideally) know candidates’ prior roles, job performance & references. And, to be cynical, because they’re an ideal CYA defence for managers if an employee doesn’t work out!

And recruiters have embraced this brave new world as opportunity. As clients become ever larger & more global, they choose the biggest & best recruiters (locally & globally). [So it’s a huge challenge now for recruiters to startup their own firms]. Which has accelerated industry consolidation & put the emphasis on flexible talent – i.e. temporary/contract workers, managed workforce & talent/training solutions, as companies adapt/flex/outsource their staff needs & business processes. But the job remains the same: ‘We provide them with the right talent, with the right skills, in the right place & at the right time’. And AI’s likely to support/enhance humans in their roles for years to come – it may require a new generation of entrepreneurs & innovators, management & workers, offices & factory floors, before technology displaces human workers. [You read Christiansen, now read Carlota Perez!]. Meanwhile, leading recruiters will embrace AI in their own businesses, continue to consolidate & focus on higher value/multi-disciplinary candidates, opportunities & services. Let’s not forget:

Once you start hiring less bodies…you need to start hiring more brains!

And now, Cpl Resources – this video is three years old, but it’s still an excellent introduction:

And this more recent video also showcases Cpl’s talent solutions, management, culture/values, clients & candidates:

Cpl has two divisions: Permanent (recruitment) works on a contingent fee basis – clients are only billed when candidates are placed, usually at 15-30% of annual salary (depending on positions & compensation, client relationship & level of business, fee & discount agreements, etc.), on which Cpl earns a (near) 100% gross margin. While Flexible Talent (managed solutions, temporary/contract recruitment, training & strategic talent advisory services) is on a contract basis – clients are billed for the (ongoing) provision of temporary/contract/managed solutions workers, on which Cpl earns a 12.8% gross margin. But this is cost-plus billing – i.e. workers’ salaries/related expense plus Cpl’s fees – so revenue’s primarily a re-billing of pass-through costs, on which Cpl charges an average 14.7% fee (reflecting 10-15% temporary/contract & higher managed solutions fee rates).

Per IFRS accounting, Cpl’s revenue (95% of which is Flexible Talent) & its 17% gross margin is therefore on an apples & oranges basis – aggregating such distinct billing/reporting doesn’t lend itself to meaningful analysis. And screens badly: Peer comparisons can be misleading & revenue-based metrics distorted. [Even in its geographic segment reporting (Note 2. of its accounts) – the UK & Rest of World has actually averaged about 25% of gross profit in the last few years]. Another reason for Cpl’s multiple (who swoons for a recruiter on a sub-5% operating margin?), but management does highlight Conversion Ratios (vs. gross profit, i.e. underlying revenue/net fee income). In 2019, Cpl pulled in €96 million in net fee income/gross profit, on which it earned a €26 million adjusted operating profit – see page 3 of the annual report – that’s a 26.7% adjusted operating margin, as you might expect from a professional services firm in a healthy economic environment!

NB:  Ignore revenue – focus on/calculate metrics in terms of Gross Profit!

OK, Cpl’s name…is (presumably) a combo. of Computer Placement (Heraty’s original company) & Human Resources. Sure, it comes with lots of personal history & brand identity, but a name change might better reflect the group’s continued evolution…and I’d happily bet it adds a big figure to its P/E multiple! [I made the same argument here: Two months later, the company announced a name-change to Donegal Investment Group…it’s a 3-bagger since!] Some mash-up of Cpl Talent Resources & Covalen Managed Solutions Group is worth considering…

Now, here’s Cpl’s financials for the last 6 years:

I highlight this impressive growth, because some months after its FY-2013 results, Cpl’s share price reached a EUR 7.90 high…and has somehow managed to trade sideways/lower ever since!?

Back in Jan-2014, Cpl boasted a 23 P/E – today, it’s on an 9.1 P/E & an ex-cash 7.2 P/E!? But the naysayers will argue: i) its 2014 P/E was absurdly overvalued, ii) will never be repeated, but iii) a 9 P/E valuation is appropriate today & for years to come! That’s some juggling act…outdone only by Cpl’s astonishing long-term price chart:

But not so astonishing, if you’re familiar with the Irish benchmark ISEQ index:

Both charts reflect a crazy 2005-09 period of Celtic Tiger exuberance & despair. But despite the roller-coaster ride, long-term Cpl investors did much better: Versus a 77 cents per share IPO (at an 11.8 P/E) & significant multiple compression, they have a 11-bagger stock (inc. cumulative dividends) 20 years later! No surprise really, checking Cpl’s long-term fundamentals:

[NB: FY-2009 excludes a non-cash €8.1 million goodwill impairment. And pre-2003, Cpl was a quite different Permanent-focused business – since then, gross margin’s averaged about 17%.]

[ALERT: And yes, I’ll summarise below…no need to go blind here!]

These financials eviscerate the misconception Cpl’s simply a cyclical business to be avoided at all costs…well, unless its shares collapse again, like in 2008-09, and you scoop ’em up hand over fist! That’s an easy game-plan looking at an old price chart…not that most investors are any good at sticking to plans. In reality, what are the odds you miss out on years of positive fundamentals & share price gains?

Squint at the long-term price chart again: Now discount that crazy 2005-09 period – as we must do with almost every stock/business – and gloss over that curious 2013-14 surge & reversal. Yep, looks like a growth stock to me! A cyclical growth stock, if you prefer…but pretty much all long-term growth stock charts boast just as many/if not more horrific price reversals (often God-knows-why!). Does second-guessing economic cycles AND second-guessing other investors’ second-guessing somehow make a cyclical growth stock easier to duck in/out of? That kind of market timing’s next to impossible… Its long-term record’s ultimately the best argument Cpl’s a compounder – these CAGRs are inescapable:

[NB: Dividend initiated in FY-2000, so final dividend CAGR is for 19 years.]

Cpl’s key P&L metrics keep marching ahead relentlessly at an average 13% CAGR! Now ask yourself:

Is this something I want to own…on a 9 P/E?!

Now, you may still need a strong stomach along the way…yeah but, isn’t this true of all growth stocks? And Cpl boasts some critical & unappreciated contra-cyclical characteristics in a downturn/full-blown recession:

i) The business pukes cash as receivables unwind: In 2001-02, cumulative free cash flow was 136% of net income (€6.7 vs. €4.9 million), while in 2009-10 it was 102% of net income (€13.5 vs. €13.2 million). If you shrug at these ratios, I suggest you compare ’em vs. an average company’s cash conversion today, let alone its profits & cash flow in a financial crisis/economic recession!?

ii) Flexible Talent holds up better: As companies enforce (permanent) hiring freezes, they’re often more comfortable keeping/hiring temporary, contract & managed solutions workers to plug ongoing gaps, and provide necessary temporary & semi-permanent backup/coverage of roles as mass redundancies & aggressive restructuring are implemented. In 2009-10, Permanent gross profit cratered 68%, whereas Flexible Talent gross profit declined 27% & gross margin held up astonishingly well (an average 11.3% vs. a 2008 peak of 11.9%).

iii) Its cost base adjusts automatically: Many recruiters earn a modest base salary, with a substantial % of total comp. coming from (successful/ongoing placement) commissions & bonuses. Which decline & then disappear in a recession – prompting recruiters to leave Cpl, look for salaried jobs elsewhere, emigrate, or just go traveling. [Cpl’s never announced any redundancy or restructuring charges, and benefits from this natural culling of its weaker recruiters]. The company’s G&A declined 26% in both 2002 (vs. 2001) & 2010 (vs. 2008).

iv) And perversely, it’s a marvelous time for acquisitions: On average, I count nearly half a dozen individual businesses acquired by Cpl in each of the recessionary 2000-02 & 2009-10 periods, many in/close to bankruptcy. As Buffett would say…be greedy when others are fearful!

Of course, you also want a high quality compounder:

Cpl’s sole impairment was a non-cash goodwill charge back in 2009. [No surprise…and, with hindsight, unnecessary]. Its only restatement was a mandated 2006 GAAP-IFRS accounting transition (to exclude prior year goodwill amortisation). And its only earnings adjustment’s in the management commentary: In the last 5 years, adjusted operating profit excludes a non-cash LTIP expense (& immaterial currency translation) – notably, no adjusted EPS figure is provided. Otherwise, nothing…

Cpl’s cash flow is also impressive – PPE & intangibles investment is just €1.2 million pa (& no inventory to worry about!). Cash conversion (i.e. free cash flow vs. net income) averaged over 85% in the last 20 years & free cash flow turned negative just once – a mere €(0.3) million in 2004, book-ended by blockbuster cash flow years. While its balance sheet’s always boasted net cash. The only other significant asset is €43 million of net working capital – I tend to ignore goodwill – receivables have grown with revenues to €117 million, but have been accompanied by similar payables growth (to €74 million). Cpl has a €1 million acquisition liability, no pension deficit & no other long-term/contingent liabilities….and an IFRS 16 lease liability of just €9-13 million to be added this year, a reminder of how small its physical footprint needs to be despite multiple brands/offices.

Cpl’s gross receivables might look steep, but reflect re-billing of pass-through costs in Flexible Talent (95% of total revenue). And include €29 million of accrued income (from ‘the performance of contract obligations…which had not been billed prior to year end’) & a likely disproportionate share of Permanent fee revenue. [Clients may take 3 months to pay & still won’t pay/only pay in increments ’til their refund period lapses, as permanent recruiters often offer a short-term/sliding-scale refund for hires who don’t work out]. So net-net, working capital’s basically limited to Permanent receivables & accrued Flexible Talent income, with Flexible Talent otherwise funded by outstanding payables. Which makes sense – such re-billing requires rigid financial control & process to match up gross cash-flows (as much as possible), limit credit risk & avoid an exploding working capital requirement.

[NB: One customer exceeds 11% of total revenue…which may seem alarming. But again, ignore revenue-based metrics: Based on average underlying fee & margin rates, this is closer to 8% of gross/operating profit, a manageable risk vs. Cpl’s current/longer-term growth trajectory.]

And that’s why Flexible Talent is increasingly limited to larger staffing companies – clients expect & require such processes, controls & balance sheet strength. Cpl ‘has a credit policy in place & the exposure to credit risk is monitored on an ongoing basis’, and KPMG recently concluded ‘based on our knowledge of the business & the historic experience of successful recoverability of substantially all trade receivables at each year end, we have not assessed this as one of the most significant risks in our current year audit’. And to sum up: Cpl’s largest debt write-off ever was…an immaterial €0.4 million back in 2010!

So it’s no surprise management’s capital allocation is just as impressive. Cpl’s a company that raised just €2.3 million from its IPO & has relied ever since on its own cash flow to fund its balance sheet, underwrite its acquisitions, grow net income ten-fold, pay dividends & buyback shares. [The haters don’t realise Cpl becoming a listed company wasn’t about funding…but it’s been an excellent seal of approval in winning business from global multi-nationals]. And spent more on share buybacks (€45 million) in the last 8 years, than it did on acquisitions (€42 million) in the last twenty…a great reminder Cpl’s a primarily organic growth story!

Not that acquisitions aren’t welcome: I count nearly two dozen individual businesses acquired over the last two decades, where Cpl only paid an average sub-6 times operating profit/PBT multiple, generally with 75% cash up-front & the balance in deferred (cash) consideration. The only unsuccessful deal would appear to be this 2012 Swedish deal (reversed in 2013…fortunately, mostly subject to a deferred earn-out, so the financial impact was immaterial). [Arguably, Heraty’s most successful deal was long before the IPO…in 1992, when she bought out her original financial backer in the depths of recession!] Cpl’s taken a more measured approach since, completing its two largest acquisitions – Clinical Professionals in 2015 & RIG Healthcare in 2017, both UK pharma & life sciences/healthcare recruiters – with each management team notably retaining a 9-10% direct stake in their companies.

But ultimately, Cpl’s success can be traced back to CEO Anne Heraty (& her husband Paul Carroll), excellent owner-operators with a stable 35%+ stake. [Carroll keeps a lower profile…he encouraged Heraty to startup Cpl, but continued with his own corporate HR career before finally joining Cpl in 1996 as Business Development Director, bringing ‘a specific corporate perspective that’s often missing in a recruiter’]. Over the years, they’ve sold shares & taken advantage of tender offers. [NB: Heraty/Carroll did not participate in the board’s tender discussions]. Which investors should welcome – dominant stakes pose their own risks/issues – whereas 20-40% owner-operator/founding family stakes tend to ensure maximum alignment with vs. abuse of other shareholders. And they’re parsimonious with share awards: Counting a small post-IPO option scheme & a more recent LTIP scheme (for executives, not Heraty & Carroll), dilution’s limited to just 4.5% in the last 20 years! [So, about a year’s worth for a tech stock..?!] Which is dwarfed by the opportunistic buyback of over 10 million shares, via two tender offers at an average €4.34 per share (inc. tender premiums), with outstanding shares today scarcely more than 75% of Cpl’s post-IPO share count.

Their €0.7 million annual comp is also frugal…and not much higher (in real terms) than their post-IPO pay! As for owning Cpl’s original HQ, it pre-dates the IPO, it’s flagged as a related-party deal & the €198K annual lease is obviously (below) market rent for Dublin. But still, there’s a lesson: Related-party deals, no matter how innocent/legitimate, can be a marginal red flag that persuades an institutional investor to buy…a different stock! Again, I’d bet eliminating this deal could add a half-point to Cpl’s P/E.

And Heraty’s a tireless brand ambassador for Cpl. She’s won every award going & continues to attract positive/valuable national press coverage, recognising she’s one of Ireland’s most successful female entrepreneurs & the first female CEO (& founder) of a listed company (still rare today!), and lauding the multiple business, entrepreneurship, empowerment, mentorship, sport, community & diversity initiatives she’s championed over the years via Cpl. But the real takeaway for investors is realising the grit it took for any 29 year old to found a successful business back in such a grim & recessionary era – when average unemployment was 15% – but arguably it made the company & its CEO: ‘Setting up in a recession is the right time to do it…you have to bootstrap’. Cpl’s survived three major recessions since & came back stronger every time…in fact, it’s delivered 30 years of continuous profitability! As Heraty will admit:

‘I’m not a quitter…’

I recommend watching this full interview (and Q&A):

[And after 30 years in business, someone who still cites her mother as her greatest inspiration has buckets of humility & integrity…I know where she’s coming from.]

But in all the accolades, what’s been far less lauded is Heraty’s vision – to create a company & culture where:

a) She made (& remade) it to reflect today’s candidates, workplace, Ireland – the Cpl team/environment is young, flexible, diverse & inclusive – and even though results & professionalism always come first, there’s also a real emphasis on having fun* & freedom in your career. All of which encourages & promotes the loyalty of employees, clients & candidates:

As she stresses, both internally & externally: ‘You are who you recruit…your team, the energy, the creativity, the spirit, it’s the one resource your competitors cannot replicate, and it’s maybe the only one…and the one thing that I have learned, is that it actually doesn’t matter what business you’re in, it doesn’t matter what part of the business cycle you’re in, what matters most are the people who are part of your team & the people with the will & attitude to succeed!’.

*Good Lord…how many listed companies have a blooper reel?!

b) And while acquisitions are intended to enhance/diversify the group & leverage its centralised functions, they only go ahead if a target team/business complements Cpl’s corporate culture (‘it’s [not] about being big…it’s about being the best!’). And equally, they’re designed to preserve & grow the entrepreneurial spirit of a new brand, its execs & its team.

There’s also been minimal recognition (even among shareholders) of Heraty’s long-term strategy, which we can trace via four key/pivotal decisions made over the last 3 decades:

I) Back in 1989, Heraty worked for Grafton Recruitment (to its chagrin, a Cpl rival today), and grew frustrated working as a generalist recruiter (the industry norm then). She saw a future where recruiters would specialise in a single sector…with technology being the obvious bet, despite being a tiny/emerging sector in Ireland at the time. This was Cpl’s origin story…and despite a terrible domestic economy, her bet on technology delivered an impressive first decade of (pre-IPO) growth.

II) Unfortunately, it didn’t look so smart by 2000, in the wake of Y2K & the dot-com crash! In response, Heraty set out to transform Cpl into a more generalist recruiter – but with a twist – one built on specialist sector verticals & recruiters. Which was all part of a bigger plan to protect, grow & diversify Cpl’s business – not only developing verticals organically, but also via its first acquisition spree, funded by cash flow & its IPO fund-raising (nice timing!). Needless to say, 2000-02 was a marvelous period for acquisitions…

III) The 2008 global financial crisis heralded the next key decision: To embrace the temporary/contract business & transform Cpl into a genuine talent platform company. Which may not be quite as scalable – since the human element’s critical to the recruitment process – but Cpl enjoys many of the same network effects, offering access to almost 3,500 client companies AND an entire spectrum* of temporary, contract & permanent job opportunities. A compelling proposition for Millennials who’ve chosen a quite different working style/environment & life/career balance, and still have most of their careers ahead…ideally establishing a relationship with Cpl for years & potentially decades to come. The same is true for clients, who now require far more flexibility & cross-disciplinary skills in their workforce, and are attracted by the 1.3 million candidates Cpl’s platform can offer.

[*As with most recruiters, graduate recruitment is maybe the missing part of this spectrum – it’s a very different recruitment process, but an intriguing opportunity to connect with candidates even earlier in their careers & lends itself well to a more scalable marketing/social media/software-driven business.]

Of course, other recruiters made the same pivot – many for more existential reasons – i.e. win any business, at any price, even temporary/contract business! This transition’s reflected in the 2008-15 decline in Cpl’s Flexible Talent gross margin to 9.4% (slowing EPS growth for some years, after its initial post-recession years of recovery), which has since recovered to a new all-time high of 12.8% as pricing pressure abated. And we see this secular shift in Flexible Talent’s 71%+ share of gross profit today…vs. an average 47% share, for example, in 2005-07:

IV) And now we have perhaps Heraty’s most important decision – to rebrand Cpl’s growing managed solutions business as Covalen, and plan its launch in target European countries later this financial year. The growth in this business also contributed to the recovery/new high in Flexible Talent’s share of gross profit in the last four years & was responsible for a spectacular stabilisation & improvement in free cash flow (which historically has required increased working capital when Cpl’s growing strongly), which averaged 112% of net income in the last three years!

[NB: Employees are ultimately contract workers hired for specific assignments – managed solutions bills (agreed) hours worked to deliver specified processes & levels of service, per custom KPIs & SLAs. It does not suffer any IFRS 15 revenue recognition issues, nor take on the risk of fixed-price long-term contracts, which has tripped up other companies/even bankrupted some large UK outsourcers. Its white-collar focus ensures no zero-hours controversy, albeit it may not totally immunise Ireland’s #compoculture. And as a wounded #oldmedia fights back, all providers should presume they’ll end up targeted in an endless #BigTech negative news/spin cycle – service contracts must be priced, negotiated & legally blessed accordingly.]

Building on its talent platform, this heralds a new era where Cpl will focus more on & aggressively market its skills & reputation as a HR/workforce/project outsourcer, recognising managed contract work’s now the sweet spot for Millennial candidates & global multi-national clients.

And also for Cpl…

Because while many investors are repelled by Permanent’s cyclicality, just as many lament Flexible Talent’s lower fees…a classic bird in the hand vs. two in the bush dilemma, with most recruiters addicted to Permanent’s higher/up-front fees. But despite shorter (permanent) Millennial job tenure – of maybe 2-3 years, vs. 5-10 years+ for older workers – temporary/contract business can be just as/if not more lucrative in terms of total fees earned over time. But that presumes recruiters can keep (re-)capturing candidates/client business. And that’s why managed solutions is the superior business model – it commands a value-add premium vs. regular temporary/contract fee rates, while locking in what are ideally multi-year client (& candidate) relationships that come with significant notice periods. That’s the holy grail for recruiters…no wonder Covalen is #PerformanceMagic!

Hopefully, Cpl will break it out as a separate segment in due course…but triangulating some prior management commentary & stats, I’d estimate managed solutions’ recurring revenue now amounts to perhaps 25% plus of Cpl’s gross profit/net fee income.

And with its launch, we’re witnessing yet another transformation – perhaps the most lucrative yet – where Cpl reinvents itself as a:

Talent-as-a-Service (TaaS) Company

Heraty has merged the best of Cpl’s Permanent & Flexible Talent businesses to create a TaaS company which boasts a steadily expanding percentage of recurring revenue…and as you well know, there’s nothing investors value more highly than XaaS recurring revenues/profits!

But this combination of culture, capital allocation & long-term strategic decision-making is typical of the best owner-operators/family companies, and the secret to their superior long-term performance. Accordingly, we should embrace Cpl’s latest transformation & the roll-out of Covalen in target European markets. And noting its sub-€200 million market cap (vs. its current sectoral/geographic TAM), its leading position in the fastest-growing EU economy, Ireland’s unique role as the English-speaking EU/global recruitment hub, its thriving/growing UK business & network of local offices in the US/Germany/Central & Eastern Europe, its continued expansion of existing (& new) specialist verticals, and its potential for new (connected) market expansion (in Western Europe, the Middle East & maybe even Asia…e.g. the Philippines & India?), there’s little reason to doubt a high quality growth company like Cpl can (potentially) deliver the same organic (& acquisition) led growth for the next 20-30 years.

All of which is supported by its own #FutureofWork Institute – a platform for thought leadership & the co-creation of new workplace/workforce solutions with its clients. This also comes with a specific emphasis on partnering with innovative technology companies/startups to harness & leverage AI/technology processes & solutions within its day-to-day recruitment & managed solutions business (e.g. check out this podcast).

Now, we could check out Cpl’s relative valuation…I’d offer a Xaas comp. table, except the naysayers would die of apoplexy! [Surveying its staffing peers – from global large caps (averaging $6.5 billion) to similar UK/Euro firms (averaging $0.6 billion) – offers an average 11-14 P/E range. And maybe the best comp was last year’s Harvey Nash Group acquisition by DBAY…at a 9.1 EV/EBITDA multiple!] But Cpl’s so damn cheap, let’s just focus on its absolute valuation – it’s a cash-rich company trading on 5.7 EV/Adj EBITDA & ex-cash 7.2 P/E multiples, despite (organic-led) 13%+ earnings per share growth over the last 5, 10 & 20 years!? Yep, here’s that long-term growth trajectory again:

And those multiples are FY-2019…with three key adjustments, Cpl’s multiples are lower again:

i) Since CY-2017, its semi-annual P&L metrics have moved sequentially higher. Noting this growth momentum – backed up by a 41% & 54% increase in its annual/final dividends & a positive trading update – we can confidently annualise Cpl’s H2-2019 for a current net income run-rate of €23.3 million.

ii) Plus, we add-back its annualised H2-2019 €0.9 million LTIP charge.

[I’ve argued this before: Most companies provide/are valued on an adjusted EPS basis (exc. share-related expense, among many other adjustments!), it’s a non-cash item, LTIPs only vest (or may never vest) over time depending on performance hurdles & continued employment, Cpl’s historic/prospective dilution’s immaterial, and I’m happy to inc. any share dilution (& continued earnings growth, ideally) in future intrinsic value estimates.]

To arrive at an 88.0 cent adj diluted EPS run-rate:

iii) Cpl’s a cash machine…per its recent earnings momentum/cash generation, we can anticipate significantly higher net cash as of (say) end-Dec 2019: Assuming free cash flow of €6.8 million (an average of H1-2018/2019) is reasonable, which implies current net cash of €47 million. And if this estimate’s a touch off, Cpl generated an average €20 million free cash flow pa in the last two years…we’ll catch up sooner rather than later!

And so, per my earnings run-rate/year-end net cash estimates, Cpl now trades on 4.9 EV/Adj EBITDA & ex-cash 6.1 P/E multiples! Though I should note my run-rate’s 6% ahead of the 83 cent FY-2020 consensus, from just 2 analysts! But since Cpl doesn’t report adjusted/ex-LTIP EPS, it isn’t clear if they include/exclude an LTIP charge – backing it out could raise estimate(s) 3-6 cents. And the brokers are historically very conservative…having won no material Cpl business over the last two decades, they’ve little incentive to be more aggressive in their estimates, or more promotional! Don’t under-estimate the cumulative impact this may have had on investor interest/sentiment. [Or forget it’s Ireland…Heraty’s prudence AND success is an infuriating combo. for a multitude of begrudgers!].

Let’s pull all this together…except we have one final naysayer elephant to kill:

#Brexit! God help us all…

Even now, I’m not fully convinced Brexit will go ahead – or conform to the latest ‘deal’ – with plenty more hurdles to come, not least a general election this week! And who knows how many years of transition, grandfathering deals & potential subsidies lie ahead…the EU will remain incentivised to reward Ireland for standing firm. And the Irish-UK special relationship has thrived over the decades…as has trade, despite significant FX* trends/volatility (just as bad as potential trade tariffs, as any CEO will confirm). [*Many forget Ireland’s break with sterling now dates back over 40 years to its EMS entry]. Cpl’s prudent to ring-fence potential Brexit uncertainty in an otherwise highly positive outlook:

But is it really any more uncertain today than in the wake of the Brexit vote…or another 3 years time, even if Brexit goes ahead? And yet Cpl keeps growing! A reminder naysayers always see an uncertain future ahead – whether it’s 20 years ago, or today – in reality, great companies make their own future…

And maybe we just end up with #BRINO#BrexitInNameOnly – a scenario where everyone can pretend they won! Sure, overall economic confidence & employment are critical to Cpl, but equally we should remember: a) cross-border recruitment generally isn’t required, while remote/cross-border workforce management is also widespread today, b) Brexit won’t change underlying realities – e.g. UK healthcare’s in a decades-long structural labour deficit, which only gets filled recruiting foreign healthcare professionals for years to come, and c) Ireland’s the young, educated & increasingly diverse/multi-lingual destination for multi-nationals (& UK ‘refugees’) setting up/expanding in a common-law, English-speaking & tax-friendly EU base. In fact, Ireland’s been winning that game for years before the Brexit vote…so while Leavers indulge their latest Singapore-on-the-Thames fantasy, they fail to notice Ireland’s a long-thriving Hong Kong to the EU (with none of the protests/politics).

So this is, in reality, a great time to separate the bulls…from the bullocks!? And maybe it’s you, not me: If you see #BrexitCannibals lurking on the horizon & are now watching zombie/apocalypse movies for critical Brexit tips, you likely have no desire to buy UK/Irish/even Euro stocks…and I won’t change your mind! Or ‘everything has a price’ – so you’re fearful of potential Brexit risks, but stand ready to scoop up some cheap UK Brexit bargains. So consider Ireland…and Cpl Resources! Or you’re another Buffett & don’t care about the macro outlook – you just want to buy high quality growth at a reasonable price. And so, I give you…Cpl Resources at a CHEAP price!

Cpl’s a cash-rich company (in a NIRP world) with an excellent capital allocation record, and I’m confident its owner-operators will ensure cash is distributed or fully recognised in the event of a deal. Therefore, I’m comfortable adding my year-end net cash estimate as a separate component of Cpl’s intrinsic value…particularly as net cash has now reached a likely all-time high, so we can reasonably presume a new acquisition and/or return of capital (ideally via another tender offer, noting the current share price & value gap) are being actively considered. [Notably, one does not preclude the other…Cpl executed its largest acquisition AND tender offer in FYs-2017/2018].

Summing up Cpl’s cash flow conversion & balance sheet, its under-estimated contra-cyclical strengths, its high-quality/organic-led long-term 13%+ earnings growth, its recent 37%+ earnings momentum, its new Covalen brand as it builds on its talent platform & evolves into a recurring revenue Talent-as-a-Service company, its strong growth potential ahead within/outside Ireland, its owner-operators who still have huge skin in the game, its low relative & absolute valuation…vs. the usual economic & employment risks recruiters face, specific Brexit risks & uncertainty in the next few years, and the eventual transition risks of a new management team, I arrive at a 13.1 P/E multiple (vs. my adjusted diluted EPS run-rate).

Which mirrors Cpl’s 20 year EPS CAGR…and is arguably conservative in light of its historic growth trajectory vs. current growth potential & risks. And let’s not forget unemployment’s now at (multi) decade lows in Cpl’s major markets, so with companies scrambling for employees & new/multi-disciplinary skill sets, a real #WarForTalent is erupting in favour of the candidate & the recruiter. [A likely boost for Cpl’s Permanent business, despite underlying secular Flexible Talent trends]. Therefore:

€0.88 Adjusted Diluted EPS Run-Rate * 13.1 P/E + (€46.8 Million End-Dec 2019 Cash / 27.4 Million O/S Shares) = €13.26 per share

A €13.26 Fair Value per Share estimate would imply current Upside Potential of 88% for Cpl Resources.

But looking at the divergence in Cpl’s fundamentals vs. its share price, we should ask when this value gap might close?! Well, as Graham said: ‘That is one of the mysteries of our business…but we know from experience that eventually the market catches up with value.’ And I’m reminded of Total Produce (TOT:ID), one of my first & cheapest ever investment theses…it was similarly neglected & unloved, trading on a sub-6 P/E  at end-2011 (albeit, with steadier but much lower earnings growth vs. Cpl). But two & half years later, it was a triple-bagger – and bizarrely, even a seven-bagger (a 19 P/E) at one point – despite earnings growth which never really escaped its typical 5-10% pa range!

So maybe, just maybe, the market awards Cpl a 23 P/E again…like in 2014!?

And I don’t believe you penalise Cpl with an illiquidity discount…though it may require more patience & further thought re position sizing. And free-float complaints are mostly a red herring – average Dublin trading volume of about €80K daily has still allowed (hedge) funds to build decent stakes as of today (& over the years). [And yes, Cpl shares are exempt from stamp duty!] You can access UK market-maker quotes in sterling, but Dublin’s an order-driven market, which may offer better execution if you’ve got the patience…and aren’t concerned the price will run away from you!

Not to mention, Heraty turns 60 in a few months…I don’t doubt she’s got the energy to run Cpl for another 20 years, but milestones encourage people to re-evaluate their priorities. She’s founded a successful business, delivered 30 years of profitability, won all the awards & is independently wealthy – so yeah, there’s huge potential ahead for Cpl, but she certainly doesn’t have anything to prove here. Perhaps she has other personal & professional interests/challenges she’d like to pursue? [For example, Heraty’s done some tech startup angel investing in the last few years – see here (from 17:40)]. And here’s a powerful speech she gave some years ago on empowerment & making choices:

But it’s difficult to imagine Heraty exiting Cpl & simply hanging onto a passive stake. Stepping up to Chairman seems far more likely, presuming a new CEO…and that’s what investors assumed with a new generation of executives: Mark Buckley joined Cpl in 2013 as CFO & was then appointed COO/Deputy CEO in 2017, with Lorna Conn replacing him as CFO later that year. Except…in its recent results, Cpl confirmed Buckley was leaving (end-September). There’s no evidence his departure (or tenure) was acrimonious, but there’s also no indication Cpl’s hiring a new COO/Deputy CEO. Which poses no issue in terms of its bench – with a CEO, CFO, a newly-appointed CIO, and business unit MDs & senior executives in place – but begs questions: Were commitments/timelines made & broken here, should investors now view executives like CFO Lorna Conn as a potential future CEO (clearly, she’s already brought a new level of rigour & discipline to Cpl’s margins & cash flow/working capital cycle), will Heraty ultimately relinquish the CEO role…and if so, can she step back & properly embrace the role of Chairman instead.

But these are questions for Heraty (& any CEO she might appoint) to grapple with, ‘cos for investors, what’s the worst that can happen if she’s a back-seat driver, or never lets go of the wheel…more of the same?!

Wow, we should be so lucky…

And while I highlight the possible risks of professional management vs. the typical prudence of owner-operators, a happy medium is within reach. Chaired by Heraty, a new CEO would inherit 30 years of history, culture, financial prudence & operational excellence…but also bring a fresh & dispassionate perspective. A more ‘industrial’ approach to acquisitions (more frequent small deals, and/or bigger deals) is warranted – Cpl’s hub & spoke model is already designed to maximise network effects, centralise admin/financial/technology functions, and attract entrepreneurial talent who value retaining a stake (per recent acquisitions) & a strong degree of operational autonomy in their businesses. While more aggressive investor relations would tackle negative sentiment, improve trading volumes/free-float & yield tangible financial benefits…a more active acquisitions policy would benefit from a compelling public vs. private arbitrage, if Cpl can establish a (consistently) higher valuation vs. its deal multiples. [Founders/owner-operators tend to focus more on the business itself – vs. the share price, which is often academic ’til they sell – as Heraty says: ‘Once the business does well, everybody does well!’] And underwriting all of this is 30 years of profitability, excellent cash conversion & a contra-cyclical ability to generate free cash flow – clearly, there’s zero/minimal risk (what’s a worse #StressTest than the #GFC?!) in re-basing the balance sheet to a zero net cash position.

And there’s an alternative…a takeover offer! Given its Irish leadership, it’s an attractive target – but it’s a people business & an acquirer’s unlikely to emerge without Heraty’s active encouragement. But today, Cpl’s multiple lags its sector & fundamentals, and the risks of succession now begin to loom, so the odds of a sale increase. And I say sale, because it’s also an alternative – if Heraty concludes she might otherwise never step away from the business, putting it up for sale might be an actual solution.

In the end, maybe I should have little confidence in my (or your) ability to predict what comes next in the UK’s Brexit adventure, or where & why the next economic crisis occurs. [But we’re a decade into a totally unprecedented fiscal & monetary experiment now…so if necessary, I’ve zero doubt the world’s politicians & central bankers will again do whatever it takes!] And who knows when Cpl’s value gap closes (or it ever gets sold)…a value trap for so many cheap companies, your IRR gets worse with every passing year! Yeah but, that’s when there’s no underlying value creation: Cpl boasts 13%+ pa earnings growth over the last two decades – despite the dot-com collapse, despite the Global Financial Crisis, despite the collapse of the Celtic Tiger. And I do have a high level of confidence in its evolving business model, its owner-operators & its potential to deliver the same earnings growth for years/even decades to come. So even if my numbers/timeline are a little off, I’m highly confident the longer I hold Cpl, the better my long-term compounded return will prove to be…

In a perfect world (& keeping the math simple), Cpl’s current 2.7% dividend yield & continued 13.1% pa earnings growth offers a 15.8% CAGR. So over the next 5 years, assuming no change in Cpl’s P/E multiple, this equates to an Upside Potential of 108% – and over 10 years, the same CAGR would offer an Upside Potential of 334%. And factoring in my 88.0 cent adjusted diluted EPS run-rate & €47 million year-end cash estimates, and assuming my fair value multiple (i.e. cash per share & a 13.1 P/E) is recognised/realised within 5 years, we could see an Upside Potential of 265%. [Despite ignoring dividend reinvestment & a continued accretion in net cash]. And over 10 years, the same scenario could offer an Upside Potential of 635%.

Obviously that’s the real prize here…

I challenge anyone to find a better company at a cheaper price…esp. now it boasts an increasing level of recurring revenue/profits, as it evolves into a Talent-as-a-Service (TaaS) platform company. Reflecting my strong level of conviction here, I currently have a 6.0% portfolio holding in Cpl Resources plc (CPL:ID) (CPS:LN).

  • Cpl Resources plc:   €7.05 per Share
  • Market Cap:  €193 Million
  • P/E Ratio:   9.1
  • Ex-Cash P/E Ratio:   7.2
  • Target Fair Value:   €13.26 per Share
  • Target P/E Ratio:   13.1     (plus net cash per share)
  • Upside Potential:   88%
  • 5 Year Target P/E Ratio:   9.1  or  13.1     (plus net cash per share)
  • 5 Year Upside Potential:   108%-265%
  • 5 Year CAGR:  15.8%-29.6% pa
  • 10 Year Target P/E Ratio:   9.1  or  13.1     (plus net cash per share)
  • 10 Year Upside Potential:   334%-635%
  • 10 Year CAGR:  15.9%-22.1% pa