Skilled MD, Mick McMahon: “We’d far sooner be paying money to...

Skilled MD, Mick McMahon: “We’d far sooner be paying money to shareholders than paying it to the banks”

To wit, note the following trends:

INTEREST EXPENSE:
DH10: $13.7m
JH11: $10.0m
DH11: $5.3m
JH12: $3.2m

DIVIDENDS PER SHARE
DH10: zero
JH11: 3cps
DH11: 5cp
JH12: 8cps

Besides the dividend serendipity, there is a lot to like about this result (to this end, Slide 6 in the presentation is telling, showing 14 green arrows pointing upwards, and just the one red arrow pointing downwards, but that was a result of a conscious decision to exit unprofitable revenue streams), not just in the context of what just happened but, more importantly, what the future holds.

Specifically, the outlook commentary I found to both positive and highly credible.

In terms of the revenue opportunity, what was noteworthy to me was McMahon’s emphasising on several occasions that, in the resources sector, Skilled Group is principally exposed to mining volumes (i.e., in the provision of operating and maintenance staff), and to a far lesser extent is exposed to project-related work.

Across each of Skilled’s three operating segments, Workforce Services, Technical Professionals, and Marine Services, revenue prospects were couched in positively trending terms:
- recent contract wins in Workforce Services, which would make a material contribution in FY13,
- in Technical Professionals, increasing demand for nursing staff and ongoing growth in demand for technical staff, especially in the energy sector, as well as continuing “strong revenue and earnings growth” for Swan Recruitment, the jewel in the crown
- in Marine Services the commencement of several major new oil & gas and LNG projects for which manning contracts had been won.

And then there’s also the ongoing cost-out opportunity from:
- Timesheet automation and integration to payroll (this is still an archaically manual processing business),
- Re-developed web portals and websites
- Integrated Rates Calculator and full e-WRA rollout
- Centralisation of distributed activities
[Now in most cases I would dismiss this as mere MBA-speak or management-ese, but in SKE’s case I take it at face value, because McMahon and his team already have demonstrated the ability to do what they say they would do (in fact, exceed what they said they would do given the have already achieved $13.5 million (net) sustainable reduction in indirect cost base against $10 million target; and one year ahead of plan).]

McMahon has in the past said that a similar quantum of costs (i.e., another $13m–odd) could be taken out of the business over the next 2 or 3 years. And in the context of current pre-tax profit levels of $72m, that’s a quite meaningful driver of earnings growth, before considering any growth from the top-line or from further reductions in interest expenses.

Just as this result beat analyst expectations, so too do I believe will future results.

The other aspect of the business the analytical community fails to appreciate is the sheer cash generating abilities of the business.

While Operating Cash Flow at over $100m (JH12: $68.8m/DH11: $33m) was boosted by some one-off items (specifically a $12m cash release from a JV), even adjusting for this, OCF still exceeded consensus expectations by far, as analysts failed to appreciate the scope for reducing debtors’ days through back office process improvements.

As a result, Net Debt fell to just $27m, down from $97m jsut twelve months ago, and from $72m at the Dec 2011 balance date.

Either the company will become debt-free within the next 18 months, or the dividend payout ratio will rise to almost 100% (where it sat happily in the early 2000s before the lunatics took over the running of the asylum!).

By that logic, the stock will be yielding over 10%, fully franked (there are currently $64m, or 26cps, in surplus franking credits, so special dividends are also on the cards in the foreseeable future).

This is another thing that analysts are getting wrong: they still have dividend forecasts for SKE which I think will prove to be almost 50% too low (similar to this latest result, where everyone was expecting a final dividend of 5 or 6 cps, but the board declared 8cps.

So all up, there’s a lot to like about this result, and especially what it portends for the future shareholder valeu creation prospects.

The one consideration for prospective investors is the overhang represented by the 13% stake currently held by former MD, Mr G. Hargraves. We know Mr Hargraves – having unceremoniously disengaged from the business about 18 months ago - is a seller of the stock, and I suspect he would be viewing the current strong result announcement as a liquidity event.

Look for that line of stock, or at least a large part of it, to be placed to institutional investors shortly. It is likely to be done at a discount to the prevailing market price, so will have an impact on the stock price.

I intend to use that event to add to what is already my largest holding.

Prudent Investing Indeed

Cam