Investment case

Enero popped up in a simple screen which I have been doing for 20+ years that has generated some marvellous companies including Wellcom, Reece, ARB and JB Hifi at various points along the journey. I haven’t run the value-orientated screen for a number of years because it would invariably throw up miners with impressive ratios and short mine lives. So I was surprised to see a company with a proven business model and a long history materialise, albeit with a dubious past (Photon Group).

Based on Enero’s fundamentals the company would have appeared far earlier had I cared to look. It takes me a few days to do the sort of analysis I like to do prior to an investment decision. This includes building a 10 year financial model and looking at quality aspects of the company, business model and management. Often I have a gut feeling about whether I think I’m a buyer prior to undertaking this analysis and this was the case for Enero. It’s not always the case though, it is well worth going through the process, not least to get a feel for management. In this regard Enero has had some changes, so the growth trajectory over the last few years needs to be confirmed under the new management structure. The new CEO is well credentialed and has overhauled the management team. Management equity holdings are relatively low.

This company trades on a P/E (abnormals adjusted) of around 10X and has done for some time. The main assets are the company’s 600 people, accordingly the business is not capital intensive and operates with manageable gearing. Cash flows are strongly positive and the company can organically grow with its existing balance sheet. A healthy dividend has been paid at a payout ratio circa 55% over the last 4 financial periods. Guidance in October shows revenue is up 22.6% for the Q1 22 and earnings multiples ahead by circa 50% pointing toward a strong first half.

Being people reliant there are potential wage pressure risks and it is interesting that the company has recently granted every employee 500 shares as an equity incentive, The company has a global presence (45% Revenue Australia) which spreads risk, and gives scope for growth and importantly there is a low key client risk. The top 10 clients provide 48% of revenue. Whilst management is focussed on the big clients it has a broad spread in the event of losing a client. Enero has demonstrated its ability to win a considerable number of awards within the industry. Glass Door can be revealing but indicates to me that employees are generally satisfied, a good sign. Clearly the business has cyclical qualities and is people reliant. PR and brand development will be early casualties in an economic downturn.

Unfortunately there is no segmental reporting of their business units, rather geographical segmentation. The company is acquisitive and growth by acquisition is part of their growth model. The company considers tech, healthcare and consumer to be targeted high-growth verticals.

A possible option for excess capital would be a share buy-back. However the company appears to prefer high dividend payout ratios so the opportunity exists for the shareholder to buy shares upon receipt of dividends to increase ones holding to effectively attain the same benefit (and capture the franking credits).

My view is that the turnaround has largely been done whilst the reputation needs time to build, with a new management team the company seems to need to convince the market that growth will continue, or at least not retreat. This environment has created a still attractive valuation in my view, notwithstanding the re-rate over the past year.