Opinion: City Comment – Morson’s withdrawal from AIM
Fri, 8 June | By Kevin Lapwood, head of support services equity research, and Caroline de La Soujeole, support services analyst, Seymour Pierce
In what are undoubtedly challenging markets for all recruitment companies, it is difficult to escape the conclusion that the stock market has little or no sympathy for laggards.
Take the case of Morson, a Manchester-based technical contract recruitment specialist that made its debut on the AIM market in 2006. In those far off days, it raised £36m by selling shares at 160p valuing the whole company at £73m. The objectives of listing included allowing the company to use its quoted equity to grow both through acquisition and organically by attracting the best industry talent. The proceeds were used to pay down debt finance. By the middle of 2007, the share price had reached 256p, valuing the company at £115m and resulting in the shares trading on a price to earnings multiple of 15.3 times. Share options were issued to management and employees at between 89.5p and 285p per share and everyone, including the investors, was happy.
Since then however, things have taken a sharp turn for the worse. The share price plummeted to a low of 38p earlier this year valuing the company at just £17m, and resulting in a prospective PE (price/earnings) multiple of less than 4 times, well below the current Seymour Pierce small cap average value of 6.8 times. In response, the Morson management has recently announced that it will take the company private, buying back its shares for 50p per share. Their disillusion has been spurred by the fact that despite growing revenue and net fee income rising by an average annual rate of 9.2% and 11.4% respectively since the listing, the market has substantially de-rated the shares. The main reason for this has been the recession. Recruitment is a highly cyclical activity and share ratings vary accordingly.
However, there are other reasons, which are more specific to Morson. The first is profitability. Despite recording strong top-line growth during the recession, profits have been stagnant at best. Since listing, adjusted pre-tax profits have fallen on average by 5.7% a year and earnings by 3.5% a year. Clearly, the acquisitions that were part of the strategic rationale for listing have swelled the top line but failed to deliver earnings enhancement. Moreover, the acquisitions were largely made for cash, not equity, so that net debt at the end of 2011 was almost back at pre-flotation levels at a time when many peers have healthy cash balances.
The final blow however was the inevitable impact that high gearing and falling earnings would have on dividends. The company announced in December that it would pass its final dividend for 2011, thereby cutting its payout to investors by 67%, although the fall in earnings that year was only 13%. Few things are more likely to send investors into the bunker than high debt and a major cut in the dividend. On the plus side, the directors, having sold half of their business for £36m in 2006, now get to buy it back for £12m. Who says markets don’t work?
Kevin Lapwood, head of support services equity research, and Caroline de La Soujeole, support services analyst, Seymour Pierce