Matchtech Group

29 January 2015
Company Details

Transformational acquisition of Networkers

International

EPIC

There is no magic formula for completing successful acquisitions. However

Market cap

the very best deals typically fall into 1 of the following 5 camps. Either to: 1)

12m target price

create market access for products/services, 2) acquire skills more quickly or

at lower cost than they could be built in-house, 3) improve the performance

AIM: MTEC

Current price p

507p

52 week High/Low

635p / 500p
126m
710p

Net debt

3.0m

Free float

58%

Avg. daily volume

15,000

of the target, 4) remove excess capacity, or 5) snap-up rising stars early.

Whats very unusual is to find a transaction that ticks more than 1 box. Well,
we think Matchtechs agreed purchase of Networkers International
(AIM: NWKI) - for 57.9m (67.4p/share, split 34p in cash and 0.063256
new MTEC shares) - satisfies all of the first 3.

Share Price, p
690
640
590
540

490
440
390

Strong cultural and strategic fit

340

In particular the acquisition provides MTEC with additional scale (NFI up

240

62.5%) in the UK, along with offering attractive expansion opportunities

290

190
01/12

07/12

01/13

07/13

01/14

07/14

01/15

in new international markets and adjacent verticals (eg Telecoms see

Source: ADVFN

below). The combined group will not only become Britains 5th largest

Description

technology recruitment business, but also generate 28% of its Net Fee

Matchtech is the UK's leading specialist

engineering and professional services
recruitment agency, providing contract,
temporary and permanent staff.

Income (NFI) overseas and consolidate its position as the UKs #1 agency for
placing specialist engineers.
Networkers H114 NFI split by division

The Engineering division spans five specialist

sectors - Infrastructure; Automotive, Maritime;
Aerospace; Energy as well as General
Engineering.
The Professional Services division covers
technology markets through our Connectus
and Provanis brands and Professional
Staffing though our Alderwood and Barclay
Meade brands.
Next News:
Interims 9th April 2015

All our research is available at

www.equitydevelopment.co.uk

Equity Development contacts

Paul Hill (Analyst)

Source: Networkers International plc

0207 065 2690

paul.hill@equitydevelopment.co.uk

Gilbert Ellacombe
0207 065 2698
gilbert@equitydevelopment.co.uk

Please refer to the important disclosures shown on the back page and note that post MiFID this information is categorised as Marketing Material

Matchtech Group

29 January 2015

71% of Networkers 2013 NFI was derived from outside the UK (see below),
compared to less than 2% for Matchtech.
Regional breakdown of Networkers 2013 NFI (29.1m)

Source: Networkers International plc (EANA = Europe and North America)

Sensible deal multiples

Whats more, we think the 57.9m price-tag (Est EV of 68.6m including
10.7m of net debt) represents compelling value equivalent to 2014
EV/EBIT and P/E ratios of 9.7x and 13.5x, falling to 9.1x and 12.7x in 2015. This
compares to Matchtech (at 507p), which presently trades on FY15 operating profit
and earnings multiples of 12.3x and 9.1x respectively.
Meaning that purely in terms of bottom line impact ie of equity transferred for
each of profit obtained - only a small premium is being paid to obtain such
a strategic asset that has the potential to literally propel Matchtech to the next
level.
Combined group

Source: Companies data, based on LTM reported numbers

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29 January 2015

Matchtech Group

The deal has been approved by both management teams, with 72.9% of
irrevocable undertakings already received from Networkers directors and major
shareholders. The 29.24m cash consideration is being funded via a new 30m 3
year term facility with HSBC, at an interest rate of 1%-3% above LIBOR
dependent on gearing.

10.3% pa CAGR for Networkers adjusted PBT 2006-15

Although Networkers profits have flat-lined since 2012, growth is expected to
resume in 2015 with adjusted PBT climbing to 7.5m (+10%) thanks to
improved market conditions in telecoms, as well as continued strong growth in
Energy and Engineering. The former being supported by the roll out of 3G, 4G
and next-generation wireless networks.
Networkers through-cycle growth in adjusted PBT (millions)
8.0
7.0

7.0

7.1

2012

2013

7.5

6.8

6.6

6.0

5.6
5.1

5.0

4.6
4.0

4.0
3.1
3.0
2.0
2006

2007

2008

2009

2010

2011

2014

2015

Source: Actuals (Networkers) and forecasts (City consensus)

Significant synergies available

It is too early at this stage to accurately quantify synergies, albeit we think in the
medium to long term they could be substantial. Firstly Networkers geographical
footprint should provide an ideal springboard to replicate the success overseas
of MTECs UK engineering operation.
Next, there is also potential for cross-selling (limited client cross-over), and
capturing a greater slice of customer wallets by placing more difficult to
find specialists (perhaps even whole teams), as technologies within the IT,
telecommunications and engineering verticals converge (eg automotive).
Finally cost savings are also achievable for example by streamlining Plc costs,
eliminating duplicate listing fees and consolidating back-office functions. The
transaction is expected to be earnings enhancing in the first full year of
ownership.
In terms of integration, the Networkers brand will be retained with completion
scheduled for 2nd April. Given the close cultural fit, the Board is confident that the
two businesses can be seamlessly merged without any significant underlying
disruption to operations.
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Matchtech Group

29 January 2015

Proposed new board

In relation to continuity, both Networkers CEO (Spencer Manual) and CFO Jon
Plassard will become directors of the new management board (see below) and
have agreed to sign a 2 year lock-up agreement.
Structure of new management team

Source: Company

The one notable omission from the combined Board however is Matchtechs
existing CEO Adrian Gunn (50), who has decided to bring forward his retirement
(which he originally planned for 2016), and is stepping down with immediate
effect.
Brian Wilkinson will transfer from Executive Chairman to CEO and Ric Piper,
currently Senior Independent Non-Exec, will assume the role of Interim NonExecutive Chairman until a permanent replacement is identified.
Roger Goodman, currently Non-Exec Chairman of Networkers, will join the
Matchtech Board as a Non-Exec.

On track for another successful year

Elsewhere, both companies also released positive pre-close trading statements
yesterday, saying they were on track to hit their full year numbers.
As such we make no changes to our previous forecasts and 710p/share
target price for Matchtech, and believe H215 should see NFI accelerate from
+2% in the first half, as recently hired fee earners (eg in engineering) ramp up
activity.
Divisionally there is continued strong demand for engineers with H114 NFI up
+6%, driven by permanent (+22%) and temporary (+3%) placements - albeit
slightly offset by contractor declines in oil/gas (Re: lower crude price) and
Maritime following the closure of shipbuilding at Portsmouth Naval Base. The 5%
fall in Professional Services NFI was due to lower demand in Staffing (eg HR,
Finance) where NFI fell 13%, conditions proved challenging and headcount was
trimmed. Technology NFI was broadly flat YoY. We hope to hear more details at
the interims on 9th April 2015, with the intention of publishing our first forecasts
for the combined group.

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29 January 2015

Matchtech Group

Summary forecasts
Matchtech
(July yearend)

2013 Act
'000s

2014 Act
'000s

2015 Est
'000s

2016 Est
'000s

Turnover
% growth

408,926
10.1%

451,591
10.4%

469,655
4.0%

488,441
4.0%

Gross margin / NFI

NFI growth rate

38,372
6.2%

44,982
17.2%

47,509
5.6%

50,167
5.6%

Adjusted EBITA

10,698

13,621

14,290

15,406

Adjusted PBTA

10,096

12,606

13,675

14,991

Adjusted diluted EPS (p)

Adjusted EPS growth rate

31.6
34.3%

36.9
17.1%

41.1
11.1%

45.3
10.4%

Dividend (p)

18.0

20.0

22.0

24.2

Valuation benchmarks
Adj NFI / EBITA conversion
P/E ratio (diluted)
EV/NFI
EV/EBITA
PEG ratio
Dividend yield
ROE

27.9%
16.1
3.4
12.1
0.47
3.6%
23.9%

30.3%
13.7
2.9
9.5
0.80
3.9%
22.6%

30.1%
12.3
2.7
9.1
1.11
4.3%
23.1%

30.7%
11.2
2.6
8.4
1.07
4.8%
25.2%

Net cash/(debt)

-10,493

-3,109

2,232

8,155

Shareprice (p)

507

Source: Actuals Historic Data, Equity Development estimates

Shares look cheap, offering 40% upside vs 710p TP

With regards to valuation, Matchtech stock (at 507p) trades on FY15 EV/EBIT and
PER multiples of 12.3x and 9.1x respectively, plus offering a 4.3% dividend yield.
We think this 20%+ discount (see below) to the recruitment sector is unjustified
and expect the shares to trend towards our target price in due course.
Current Year EV/EBIT Ratios
Sector average

11.2

Robert Walters

12.4

Michael Page

18.5

Hays

13.3

Matchtech

9.1

Sthree

11.7

Networkers
International

8.4

Staffline

9.7

Harvey Nash
-4.0

6.4
0.0

4.0

8.0

12.0

16.0

20.0

Source: ED (Prices as at 28th January 2015 - arithmetic average for sector)

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Matchtech Group

29 January 2015

Current Year P/E Ratios

Sector average

15.8

Robert Walters

21.6

Michael Page

22.1

Hays

20.3

Matchtech

12.3

Sthree

18.1

Networkers International

11.8

Staffline

11.1

Harvey Nash

9.3
0.0

5.0

10.0

15.0

20.0

25.0

Source: ED (Prices as at 28th January 2015 - arithmetic average for sector)

CEO Brian Wilkinson concluding: We're delighted to have reached agreement

with the Networkers board of directors and are very excited with the
prospects of the enlarged group. We continue to see major opportunities in
our core markets of white collar engineering and technology recruitment. Both
digitization and converging technology is creating further opportunities in these
areas and the addition of telecoms recruitment to our portfolio creates an
even stronger specialist Group. In addition, Networkers' long-standing,
substantial and profitable overseas operations will enable us to accelerate the
introduction of our Engineering services to our international customers with a
considerably reduced cost, risk and time profile."

Key Risks

Economic downturn,

Greater competition,

Customer concentration,

Overseas expansion,

Political interference which could impact UK infrastructure spend, and

Acquisition integration

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Sales Contacts
Head of Corporate

Investor Access

Gilbert Ellacombe
Direct: 0207 065 2698
Tel: 0207 065 2690
email: gilbert@equitydevelopment.co.uk

Hannah Crowe
Direct: 0207 065 2692
Tel: 0207 065 2690
email: hannah@equitydevelopment.co.uk

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