I thought you might find Wexboy's write up on CPL Resources interesting, although it's a bit dated and the company has since been acquired. It offers good insights into recruitment firms' business model that could also be relevant to your investment in Gee Group.
You should take note of the "clean profit" in 2021 for Q1 primarily stems from extinguishment of debt, and hence normalized earnings should be near zero in my opinion.
Thanks Paul for bringing this to my attention. So the PPP loan was forgiven and is being recognized as nearly 16.8 million in net income for 2022. So unless I am mistaken, this accounting will basically zero-out the NOL carryovers, right?
Still a compelling thesis. I'm not feeling confident yet about what the market re-rate might be though on a P/E level. I still need to complete my own research on this to get a better gauge on the potential upside.
Good to be aware of this. Not a deal breaker, but it will help to keep the valuation conservation.
And yes, management did mention that they do not expect to be able to use the entirety of their NOLs on their balance sheet before they expire. But I couldn't find any specifics on what that expiration schedule looks like.
For what it's worth, I'm now thinking that a normalized EBITDA multiple of 10x seems like a fair market value.
What does management intend to do with the cash flow? Is it the same one that did the risky flawed acquisition? Any chance they will screw it up again? Any likelihood of capital return back to shareholders?
Good questions and I have no clear answer on that one.
Yes, it is the same management.
The only thing that could happen is that they overpay for another acquisition - I take it as a potential risk, but assume that they'll not do the same mistake again.
The current multiple should compensate for that risk.
Anyways, I have a pending question in regards to that. Looking forward to the reply of the IR.
Hi Paul, It looks like you are adding the entire amortization. What is the amortization actually expensing? and how do you know that it wont be a real cash expense going forward?
Hi Paul,
Thanks for the excellent write-up!
I thought you might find Wexboy's write up on CPL Resources interesting, although it's a bit dated and the company has since been acquired. It offers good insights into recruitment firms' business model that could also be relevant to your investment in Gee Group.
https://wexboy.wordpress.com/2019/12/10/cpl-resources-a-most-talented-company/#more-17478
Cheers and keep up the good work!
Hi Paul.
Thanks for posting this idea :-)
You should take note of the "clean profit" in 2021 for Q1 primarily stems from extinguishment of debt, and hence normalized earnings should be near zero in my opinion.
Best Anders
Anders, everything in my calculation is correct. You've to adjust by the goodwill amortizations. FCF is around $2m.
Thanks Paul for bringing this to my attention. So the PPP loan was forgiven and is being recognized as nearly 16.8 million in net income for 2022. So unless I am mistaken, this accounting will basically zero-out the NOL carryovers, right?
Still a compelling thesis. I'm not feeling confident yet about what the market re-rate might be though on a P/E level. I still need to complete my own research on this to get a better gauge on the potential upside.
Cheers!
Hi Aaron, that's right. I did a mistake there.
Another Reader mentioned that the NOLs that I did not include will "Beginn to" expire in 2021 and do not fully expire.
In that case, the NOLs are somewhat still there.
Good to be aware of this. Not a deal breaker, but it will help to keep the valuation conservation.
And yes, management did mention that they do not expect to be able to use the entirety of their NOLs on their balance sheet before they expire. But I couldn't find any specifics on what that expiration schedule looks like.
For what it's worth, I'm now thinking that a normalized EBITDA multiple of 10x seems like a fair market value.
What does management intend to do with the cash flow? Is it the same one that did the risky flawed acquisition? Any chance they will screw it up again? Any likelihood of capital return back to shareholders?
Good questions and I have no clear answer on that one.
Yes, it is the same management.
The only thing that could happen is that they overpay for another acquisition - I take it as a potential risk, but assume that they'll not do the same mistake again.
The current multiple should compensate for that risk.
Anyways, I have a pending question in regards to that. Looking forward to the reply of the IR.
Hi Paul, It looks like you are adding the entire amortization. What is the amortization actually expensing? and how do you know that it wont be a real cash expense going forward?
Michael, after acquiring a business, a company is allowed to add intangibles to their balance sheet.
Usually, those reflect the brand, customer lists etc.
Over time, companies spend a lot of s&m for building the brand but you don't see it on the balance sheet.
After an acquisition, this becomes visible.
JOB is amortizing their acquisition expenses which are not cas expenses.
Have a look at the cash flow