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Empresaria Group, the multinational specialist staffing group, has weathered the global economic downturn relatively well, remaining profitable on an adjusted basis, and generating positive cash flows from operations throughout. The first half of 2010 heralded a strong recovery, with total revenue up by 20% to GBP108.2 million and Net Fee Income (NFI) increasing at a faster rate of 29%. The cost cutting measures taken during 2009, put Empresaria in a good position to turn this revenue growth into improved profitability going forward.

Whilst concerns still remain over the strength of the UK economy, Empresaria’s strategy of investing in start ups and acquiring businesses in high growth markets and those likely to benefit from structural changes, mean that some 66% of Net Fee Income is now derived from outside the UK. We see particularly strong growth potential from Empresaria’s largest continental European market, Germany, where deregulation continues to drive growth in temporary and contract placements, and in Asia where Empresaria is rolling out an eLearning solution and making good headway with its Recruitment Process Outsourcing service.

Our calendar 2010 forecasts show revenue growth of 16% to GBP222 million and adjusted earnings growth of over 100% to 6.3p. Across the globe the prospects for economic growth still vary from sluggish to moderate, and our forecasts for 2011 show a modest revenue growth of 4% in which Empresaria’s rest of the world operations should grow faster than the UK and Continental Europe. The company’s operational gearing and changing tax profile should allow this to translate to earnings growth of 13%.

Empresaria’s current rating of 8.4 times 2011 earnings does not appropriately value the breadth and depth of its operations, strengthening balance sheet and prospects for long term growth. With its immediate peer group on an 11.9 times forward PE rating our 78p target price based on 11 times 2011 earnings is undemanding. With the larger staffers on an average forward rating of 24 times there is further scope for Empresaria to close the rating gap as it builds scale. Our stance is buy for recovery.

Year ending 30 June	Revenues (GBP million)	EBITDA (GBP millions)	Adj. Pre-tax profits (GBP million)	Adjusted EPS (p)	DPS (p)	Nat Cash/(Debt) (GBPmillion)	PE Ratio (x)	Yield
2009 (A)	190.5	5.2	3.0	3.10	0.35	(8.0)	18.7	0.6%
2010 (E)	222.0	8.2	6.2	6.30	0.35	(7.5)	9.2	0.6%
2011 (E)	231.0	8.4	6.4	7.13	0.35	(4.7)	8.1	0.6%
2012 (E)	252.0	9.1	8.8	9.14	0.35	(0.5)	6.3	0.6%

Background

Miles Hunt, the Group’s Chief Executive, founded Empresaria in June 1996 with a strategy to develop a specialist recruitment business operating within diversified, growing market sectors. Empresaria’s growth strategy is focused on developing its existing businesses, investing in start-up businesses and making selective acquisitions. Fundamental to this strategy is the Company’s philosophy of management equity. This philosophy enables Empresaria’s key employees to acquire, or retain, a meaningful stake in the businesses they manage and helps to develop an entrepreneurial culture within the Group as well as helping to attract and retain senior management.

The company was admitted to OFEX in July 1999 and moved over to AIM in November 2004 raising GBP1.9 million of net proceeds at 65p. By this point the company had already invested in 21 start up companies and completed 7 acquisitions. Since then it has completed a number of subsequent fundraisings (most notably GBP950,000 at 95p in 2006 and GBP12 million pre expenses in 2007 at 130p) and continued its buy and build strategy at a rapid pace. The company now has over 100 offices in 17 countries comprising 38 Operating companies and 32 operating brands. Since 2005 the company has nearly quadrupled its revenues to over GBP200m for the year ending December 31st 2010 (GE&CR estimate).

Overview of operations

Empresaria has diversified its activities to cover a wide range of geographies and industries. We detail its operations by reporting segment which comprise the UK, Continental Europe & the rest of the World. As Empresaria has grown, its reliance on UK derived Net Fee Income has steadily declined with Non UK NFI now representing some 66% of the Group total. Given the breadth of the company’s brands we have concentrated on some of the more significant NFI contributors and potential engines of growth.

UK

The recession in the UK had a particularly dramatic effect on Empresaria’s permanent recruitment revenues. In 2009 the higher margin permanent placement fees contribution to Group Net Fee Income fell from 43% to 30% with temp placement revenues making up the remainder. So whilst revenues fell by just 9% NFI fell by 29%. Empresaria has embarked on a wide ranging cost cutting programme in the UK in part by merging a number of smaller operations. As a result total costs, before intangible amortisation and exceptional items, fell by 25% to GBP12.8 million in 2009.

However the first half of 2010 has shown solid signs of a recovery. Revenue increased by 11% to GBP41.1 million (2009: GBP37.1 million) and Net fee income rose by 14% to GBP8.1 million (2009: GBP7.1 million). Adjusted operating profit doubled to GBP1.0million. The main driver of this improved operating performance was the increase in revenue from permanent recruitment, rising by GBP600,000 to GBP2.9 million, a 26% increase over the prior year.

The strong H1 performance means that our full year forecast of 7% revenue growth in the UK is undemanding. The increasing contribution of higher margin permanent revenues allow us to forecast with confidence an adjusted operating profit of GBP3 million for the year.

Going forward we see a slow recovery of the UK economy in 2011 which should accelerate in 2012 and forecast revenue growth of 3% and 6.5% respectively with margins remaining largely unchanged.

Empresaria owns or has a stake in some 12 subsidiaries in the UK covering a wide range of sectors. We highlight some of these operations below.

Financial Services
The company’s key areas of expertise in this sector are Banking Operations, Secretarial and Human Resources and clients include HSBC and Gartmore. The Group’ss Mansion House brand has an added specialism in the insurance sector.

Supply Chain and Logistics
The logistics network comprises 4 brands that service the supply chain, heavy goods vehicle and logistics market. As at the time of admission the UK temporary/contract HGV driver market was estimated by the Directors to be worth approximately GBP1.4 billion. We believe that this sector is likely to enjoy prolonged structural growth in line with the exponential growth in ecommerce. According to a report by Forrester UK online retail sales will sustain double digit growth over the next 5 years.

Construction and Property Services
FastTrack is Empresaria’s flagship brand in this sector and the Board recently underlined its confidence in this high quality consultancy by acquiring a further 28% of FastTrack for a cash consideration of up to GBP1.96 million. We believe that the increased shareholding will be immediately earnings enhancing, albeit marginally. FastTrack specialises in the placement of construction and engineering personnel on both a contract and permanent basis.  FastTrack is ranked in the top 20 of the Recruitment International top 250 report for both construction and engineering businesses in the UK.

Specialist brands
The activities of this sector include:

(i) the placement of all types of domestic staff, including nannies, butlers and chauffeurs, in the UK and overseas through the Greycoat Placements brand; In April 2008 Empresaria purchased 75% of Lumleys, a brand complementary to Greycoat which provides the highest calibre of professional Catering and Hospitality staff to Private Clients, Corporate Hospitality and Events. The consideration for the stake was up to GBP510,000 in cash and shares and in June 2009 Empresaria acquired the remaining 25% of Lumleys for 251,516 shares.

(ii) recruitment-to-recruitment services providing candidates to recruitment companies on a national basis through the McCall brand;

(iii) the provision of payroll, accounting and administration services to composite companies, which are commonly-used by temporary/contract employees for their own remuneration through the Bar 2 brand.

(iv)Empresaria provides search and selection services for the creative world through its brand ‘become’. This includes traditional design roles as well as new online and mobile media. The ‘become’ brand is a result of a rebranding exercise of ‘The Recruitment Business’, 68% of which was acquired by Empresaria for a consideration of up to GBP2 million in 2005. Empresaria have now built its stake up to 79%.

Continental Europe

2009 was a year of two halves for Empresaria’s European operations. Economic stagnation of the company’s core markets caused revenues to decrease 8% for the year as a whole to GBP84.8 million. This was characterised by a 14% year on year decrease in the first half of the year but a recovery by the end of the year revenues in the 4th quarter being up 4% on the same period in 2008 and 8% up on third quarter performance. This improvement has strengthened significantly in the first half of 2010 with revenue up 33% to GBP47 million and NFI up 39% to GBP10.4 million. Adjusted operating profit was GBP1.4 million versus a loss of GBP0.3 million. That was nearly half of the group total of GBP3.1 million. Empresaria continues to keep a firm grip on costs in Continental Europe following on from a 15% reduction in operating costs in 2009 at constant currencies.

Our forecasts of 20.5% revenue growth for Continental Europe in 2010 are therefore conservative. We predict a contribution to adjusted operating profit of GBP3.8 million up 109% year on year, reflecting cost savings and operational gearing. As with the UK we forecast a modest 3% revenue growth in 2011, with margins unchanged. However given the structural growth in these markets we see revenue growth being driven to 9% in 2012.

Within Continental Europe Group operations are primarily temporary staffing and outsourced HR services and are dominated by Headway, operating in Germany and Austria and accounting for approximately 90% of the regional Net fee income. Empresaria purchased 60% of Headway for EUR14.6 million in April 2007 and has since raised its stake to 80%. The German labour market was de-regulated in 2004 in a way that allowed firms, for the first time, to hire temporary rather than permanent staff. This structural change is yet to fully work its way through the economy and is the key driver of an ever increasing demand for the German business. According to a study by the Institute for Employment Research, since April 2008 the number of subcontracted workers in Germany has risen from 582,000 since April 2009, to 750,000. We believe that German companies will continue to take advantage of a framework that allows for a more flexible workforce.

After Headway, Empresaria’s largest operation in Continental Europe is Mediradix, a healthcare staffing business based in Finland and Estonia. Empresaria acquired 60% of Mediradix in 2008, in order to take advantage of the increasing trend of Estonian doctors applying for permission to work abroad, providing MediradiX with a strong pool of candidates in a sector experiencing a skills shortage in Finland.

Empresaria also has a presence in Slovakia and the Czech Republic, with GIT consult, a leading Telco and IT recruitment specialist.

The rest of the world (ROW)

The businesses within this reporting segment are perhaps the least mature under the Empresaria umbrella, and consequently with the greatest potential to grow their contribution towards Group operating profit. In 2009 it was the only division to grow its top line with revenues up 8% to GBP34.7 million and NFI remaining unchanged at GBP7.7 million due to a change in business mix.

In the first half of 2010 the division made an impressive bound forward with revenues up 15% to GBP20.1 million and NFI surging ahead 36% to GBP5.3 million. Therefore our respective full year 2010 projections of 12% and 26% are achievable even if this performance slows considerably for the second half. We see this region being the highest growing in 2011 with revenue growth of 8% rising to 15% in 2012. We also see operating margins progressing from 3.9% of NFI in 2009 to 6.5% going forward. There is plenty of scope for Empresaria to push margins towards the high teens which we currently expect for the UK and Continental Europe.

The ROW now contributes 22% to Group NFI. The ROW encompasses Asia Pacific, and South America (Chile).

Empresaria gained its first major footholds in the Asia Pacific during 2005 when it acquired 60% of the Monroe Consulting Group in 2005 for GBP1.6 million.

The acquisition of Monroe extended the Group’s representation into three new countries, Australia, Thailand and Indonesia. The company’s Indonesian operation provides an innovative e-Learning programme across South East Asia as well as traditional staffing activities, and grew its NFI 100% during the first half of 2010.

In 2007 The Group acquired a 51% stake in PT Learning Resources Indonesia for a consideration of USD127,000. With Indonesia being a widely spread archipelago of Islands Learning Resources has seized upon the opportunity to provide e-Learning training programmes to clients with multi site offices and, normally, large workforces without incurring major productivity disruption and cost. The company is one of the market leaders in Indonesia.

Empresaria made its first foray into China in July 2008 by acquiring a 60% stake in China based Intelligence HR Consultants, a recruitment company specialising in the engineering sector.

The Indian operation has a truly global outreach benefitting from contacts across the Empresaria network. It offers Recruitment Process Outsourcing to countries including the UK, Australia and the US whereby the most labour intensive parts of the recruitment process (database compilation etc) are outsourced to specialists who can do the job efficiently at competitive rates.Net Fee Income for this division increased by 36% in the first half of 2010 and the infrastructure is now in place to drive this business forward.

In November 2007 Empresaria extended its operations to South America through the acquisition of 54% of Chilean company Alternattiva, specialising in the provision of outsourced sales and marketing staff. In Chile, the earthquake in February 2010 disrupted operations for a number of months but the interim announcement in September stated that trading is now showing a recovery and revenue is up against the prior year, albeit at lower margins.

Strategy

Empresaria’s strategy thus far has comprised of investing in start up specialist recruitment businesses, or acquiring more established operators, that are exposed to deregulating labour markets (e.g. Headway) , local skills shortages (e.g. Mediradix) or a high demand for flexible labour solutions (e.g. Indonesia).

The company’s core stated goal is ‘to be a high growth, low risk, international quoted specialist staffing group with a balanced portfolio of operations and earnings across different market sectors’ and to a large extent the company has already achieved this, rapidly growing the top line towards GBP200 million and establishing operations in 17 countries. This diversification strategy is designed to reduce the impact over time of market volatility and gain access to higher growth economies and staffing markets. In each case investments have been made alongside local management teams who have acquired or retained a material equity stake in their business, aligning the interests of key staff with shareholders. For a staffing and recruitment business, where people with local knowledge and contacts are the company’s core assets, this is vital.

The company has managed to get to this stage keeping its capital structure within comfortable limits, and based on our 2010 forecasts has a net debt/EBITDA ratio of just under 1 times. Whilst the company may still seek to make opportunistic and earnings enhancing acquisitions, its attention now seems to be focussing on growing its existing businesses and improving margins.

Financials and forecasts

Empresaria reported interim results for the 6 months ending 30th June in September. We have already touched upon our regional forecasts and recent performance. Total revenue increased by 20% to GBP108.2 million and NFI increased at a faster rate of 29%, underlying the margin benefits associated with the company’s growing scale and maturation of early stage businesses. These results are not distorted by any acquisitions and demonstrate that all of Empresaria’s divisions are growing organically. Adjusted profit before tax was GBP2.6 million compared to a loss of GBP0.3 million in the first half of 2009. This equates to adjusted earnings per share from continuing operations of 2.1p.

Cash conversion continued to be strong with GBP1 million being generated from operations over the six months. Net debt was down from GBP8 million to GBP7.6 million since the last year end but this is even more encouraging when one takes into account that net debt stood at GBP11.3million as at 30th June 2009.

Our forecasts for the full year 2010 (adjusted profit before tax of GBP6.2 million) require a GBP3.6 million contribution in the second half of the year. Given that the company has guided that the improvement in trading had continued into the third quarter, and that trading is usually skewed towards the second half, we are confident that our forecasts will be met, equating to Earnings Per Share of 6.3p. We assume the dividend will remain unchanged at 0.35p per share. We assume the dividend will remain constant going forward as the company seeks to pay down debt levels.

Since the half year end Empresaria has raised its stake in FastTrack at a cost of GBP1.96 million, and thus our forecasts leave net debt virtually unchanged from the June position, at GBP7.5 million.

In 2011 we are forecasting a modest rise in adjusted Pre tax Profit of 3.3% to GBP6.45 million but due to a mix change in territories see the tax rate dropping from 35% to 32% resulting in earnings increasing by 13% to 7.1p. This forecast could be beaten especially if the global economic recovery starts to gain momentum. Based on our current forecasts we see net debt falling by a further 37% to GBP4.7 million.

By 2012 we believe that the global economy will be at a rising point in the business cycle, and in particular that growth in Empresaria’s maturing businesses in emerging markets will be accelerating. We expect net fee income to rise by 9.1%. Furthermore we expect Empresaria to have nearly eliminated its net debt position (2012 forecast GBP0.5 million) by the end of the year and therefore expect net interest charges to be more than halved from 2010 levels to GBP0.5 million. This will allow Earnings Per Share to grow by 28% to 9.1p.

Risks and opportunities

Strengths

• Empresaria’s is strongly diversified across a range of territories and industries meaning that its exposure to one individual region is not onerous. 66% of NFI is non UK derived and we expect this figure to grow. The company is in a number of markets where structural changes in the labour market and other factors mean that NFI should outpace economic growth.
• The company is moving more into the temping/contracting market as well as business process outsourcing and eLearning which should in some part insulate profits from any further downturn.
• The company continues to strengthen its balance sheet and by the end of 2012 will be almost debt free.
• The company’s management equity strategy allows central costs to remain relatively low and is a huge incentive for regional divisions to out-perform.

Opportunities

• Empresaria’s eLearning and Business Process Outsourcing businesses are in their infancy. However they are winning clients quickly and could eventually contribute a much larger proportion of Group NFI.
• The company has a strong market position in its largest Continental European market, Germany, which continues to benefit from labour market deregulation. Also Germany has one of the strongest economies in the Eurozone and the OECD has recently lifted its GDP growth forecast for 2011 to 2.5%from 2.1%.

Weaknesses

• After stripping out GBP31.4 million of intangible assets the company has a balance sheet deficit of GBP1.3million (GECR 2010 forecasts)
• The staffing industry is a fragmented market with relatively low barriers to entry in certain markets.

Threats

• Empresaria is heavily geared to GDP growth with revenue expansion likely to outpace economic expansion. However the same is true on the downside.
• In the UK in particular, Empresaria is still significantly dependent on revenues from permanent placements which can be lumpy in nature, therefore impacting adversely on earnings visibility.

Board of Directors

Tony Martin (Chairman)
Martin served as Chairman and CEO of Select Appointments (Holdings) Limited from 1992 to 1999 when he became Vice Chairman and member of the Board of Management of Vedior NV, the world’s third largest staffing services group. In August 2000 he assumed the role of Chairman and CEO, which he served until his retirement in February 2004. Martin held the position of Executive Chairman at Corporate Services Group until standing down in September 2007. He is currently a member of Empresaria’s Audit committee.

Miles Hunt (Chief Executive)
Hunt trained as a solicitor before completing an MBA at Warwick and establishing ProSource Limited, a procurement outsourcing company, in 1995. He set up Empresaria in 1996 and has been Chief Executive since then. From 2000 to 2004 he was a non-executive director of Tribal Group plc.

Spencer Wreford (Group Finance Director)
Wreford was appointed Group Finance Director in May 2010 and has over 10 years experience in senior finance roles. He joined Empresaria from BPP Group, where he was the Finance Director of the BPP Professional Education division, a provider of international professional training. Prior to this he spent 8 years at ITE Group Plc, the international conference and exhibition organising group, as Deputy Finance Director, during which time he also spent six months as Acting Group Finance Director. Wreford is a member of the Institute of Chartered Accountants of England & Wales, qualifying with Arthur Andersen.

Penny Freer (Non-Executive Director)
Freer has worked in investment banking for over 25 years. She co-founded Capital Markets Group and is an independent director of three quoted companies: in addition to Empresaria she also sits on the Boards of Advanced Medical Solutions plc and Sinclair Pharma plc. From 2000 – 2004 she was Head of Equity Capital Markets at Robert W Baird and from 2004 – 2005, Deputy Chairman of Robert W Baird Limited. Prior to this she was Head of Small/Mid Cap Equities for Credit Lyonnais. Freer has spent the majority of her career providing strategic advice to companies on IPOs, secondary fund raisings and interaction with their investors. She joined the Board of Empresaria in December 2005. She is also the Chairwoman of Empresaria’s Remuneration committee

Zach Miles (Non-Executive Director)
Miles joined the Board on 1st October 2008, having recently held the position of Chairman and Chief Executive Officer of Vedior N.V. He was a member of the Board of Management from 1999, and Chairman since February 2004. Before joining Vedior, he was CFO and a member of the Board of Directors of Select Appointments Plc. His career in the recruitment industry began in 1988. He was formally a partner in the international accountancy firm Arthur Andersen and is a qualified Chartered Accountant. He sits on the Remuneration committee and is the Chairperson of the Audit committee.

Significant shareholders

Shareholder Name	% Holding
Caledonia Investments plc	23
Ennismore Fund Management	6.5
Liontrust Asset Management	6.38
T J D Sheffield	4.6
	40.48
Director Shareholdings
Director Name	% Holding
A V Martin	20.65
M W R Hunt	8.95
S J Wreford	0.03
P A Freer	0.03
C K Z Miles	0
Total	29.67

Valuation and Conclusion

We have considered Empresaria’s valuation in the context of UK listed staffing and recruitment companies. We have split the peer group into two segments, one whose constituents have a market capitalisation of under GBP100 million (Empresaria has a market value of GBP25 million) and those with a larger market value. With a forward price to earnings ratio of 8.1 times Empresaria is trading at a 32% discount to the smaller group. Given its diversification of revenues and industries we believe this is unwarranted and argue that our 78p target price of 11 times 2011 earnings is undemanding. As Empresaria gains scale we believe there is ample scope to raise this target price, with its larger peers being rated on 24 times forward earnings. We anticipate that Empresaria’s impressive upturn in trading during the first half of 2010 will continue and could strengthen further should the global economic recovery gather pace. Our stance is buy for recovery.

Empresaria peer group comparison.

Company Name	P/E	Yield	Mkt Cap
	Forward x	%	GBP million
RTC Group PLC	–	–	1
Highams Systems Services Group PLC	7.2	–	3
Work Group PLC	9.6	–	4
Savile Group PLC	7.6	3.3	4
ReThink Group (The) PLC	7.8	0.9	5
Prime People PLC	39.2	6.0	7
World Careers Network PLC	15.8	3.9	7
Servoca PLC	6.3	–	11
InterQuest Group PLC	6.5	4.4	18
Networkers International PLC	11.2	1.0	30
Hydrogen Group PLC	20.0	3.7	31
Harvey Nash Group PLC	11.0	4.5	37
Staffline Recruitment Group PLC	8.6	2.0	44
Morson Group PLC	7.8	5.8	47
Matchtech Group PLC	8.0	7.6	48
CPL Resources PLC – CPS (LSE)	11.9	1.4	72
Average	11.9	3.7	23.2
Healthcare Locums PLC	7.6	3.1	124
Robert Walters PLC	32.1	1.4	253
SThree PLC	26.4	4.1	360
Hays PLC	22.2	5.0	1,609
Michael Page International PLC	31.7	1.6	1,622
Average	24.0	3.0	793.6
(Source: 11/11/2010 Morning Star)
Empresaria Group PLC (SOURCE: Growth Equities and Company Research)	8.1	0.6	25

Key Data
EPIC	EMR
Share Price	58p
NMS	1,000
Spread	56p-60p
Total no of Shares	44.56 million
Market Cap	GBP25.85 million
12 Month Range	33.5p-60.5p
Market	AIM
Website	www.empresaria.com
Sector	Support Services
Contact	Miles Hunt, Chief Executive +441342 711 430