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The ReThink Group – Finals in line with expectations. Strong trading continuing into 2011. Re-iterate BUY stance with a target price of 14.8p

The ReThink Group, (ReThink) the IT recruitment and consulting business, released final results on 7th April, for the year ending 31st December 2010. These were in line with previously upgraded expectations as per the company’s trading statement and our note, both issued on 8th February.

Revenues rose by 13% to £56.4 million but even more encouragingly gross profit rose by 17% to £12.8 million driven by a 46% increase in permanent fees and 5% growth in contract margin from ReThink’s recruitment businesses. Given the operational gearing within the business this growth is amplified the further one moves down the P&L towards the bottom line. Operating profit doubled to £1.22 million and pre-tax profit more than trebled to £0.92 million. Basic earnings per share grew by 192% to 0.69p and the Board has recommended a final dividend of 0.134p bringing the full year payment to 0.188p.

Cash flows from operations more than doubled to £1 million. However net debt has increased by £1 million to £5.2 million reflecting the growing levels of business. Within that figure are included advances on invoice discounting up from £4.4 million to £6.3 million, a tool which the business uses to fund its payments to contractors. The Group renewed its £10.75m invoice discounting line during March 2011.

The businesses recruitment businesses have been performing well in both the contract and permanent markets. Despite the reduction in demand from some public sector clients, underlying growth of contract revenues remains at around 10%. ReThink expects the coming year to be one of further sizeable growth for contractor related revenues.

The RPO business has continued to strengthen and has benefited in the year by the addition of a major high street retailer as a significant customer. The Board is confident that there will be further additions in this division in the coming year.

We welcome the company’s expansion abroad, which should diversify its revenue streams into economies with greater growth prospects than the UK. The Board is encouraged by the progress of its business in the Gulf region, which has continued to build on a solid start in 2009, and expects its new operation in Singapore to be trading in the second half of 2011.

In February ReThink guided that that current trading has started well with contractor numbers continuing to grow, permanent revenues ahead of management’s expectation and a positive start from the IT & Business Consulting division, Aiimi Limited. We are glad to note that this progress has been maintained. However the Board cautions that economic outlook remains unpredictable. ReThink continues to keep a close watch on the political and economic environment but is currently experiencing strong demand in all of its business units.

We leave our 2011 forecasts unchanged but believe that they are beatable notwithstanding any unforeseen demand shocks. Therefore we continue to forecast an 84% increase in pre-tax profits to £1.6 million, and earnings per share of 1.16p. Given the company’s conservative view on the fragility of the macro environment, we are not as yet introducing 2012 forecasts. The stance remains buy with a target price of 14.8p equating to a price to earnings multiple of 12.7 times. With projected earnings per share growth of 75% we argue that this valuation is undemanding.

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