On Ashley Services' ($ASX.ASH) Labor Hire Business
Following a 70% share price decline since Feb. 2023, Ashley has seen its first material insider purchase by its founder/CEO in ~8yrs. Valuation is compelling, but the outlook and debt remain concerns
Company Overview
Ashley Services ("Ashley", "$ASX.ASH", or "the Company") is a AU$35m Australian microcap that provides labor hire, recruitment, and training services in Australia.
The Company is made up of two segments:
Labor Hire (~80% of segment profitability) - Provider of contracted labor and related support services (including payroll, HR, etc.) with a focus on blue-collar labor through Ashley's largest brand, Action Workforce (primarily focused on supply chain and logistics work)
Training (~20% of segment profitability) - Provider of nationally accredited qualifications to help train and upskill workforces
The Company is owned and operated by CEO Ross Shrimpton, who owns ~59% of the Company. Shrimpton founded Ashley after acquiring Action Workforce for just AU$2m in 1999. After 13 acquisitions completed over the next 15yrs in the labor and training industries (financed in part by multiple mortgages against Shrimpton's home ), Shrimpton took ~45% of the Company's shares public in 2014 at an implied valuation of ~AU$275m, netting himself a whopping ~AU$125m while retaining control of the remaining shares.
Shrimpton obviously did something very right over those 15yrs. Unfortunately, one look at Ashley's stock price chart shows you that the Company hasn't been able to replicate that success in the public markets over the last decade:
Why? Well, Ashley today is a different business than it was at its IPO. Following certain compliance-related issues, a very poor acquisition, and Shrimpton temporarily stepping away from the business, the Company was forced to engage in a messy restructuring of the Training segment in 2017 (which historically represented the vast majority of the Company's profitability).
Since then, the Training segment has actually had a remarkable turnaround and is growing strongly, but it is nowhere near the scale it used to be. The majority of the Company's value currently is in its Labor Hire segment, which is what we'll be focused on.
So what does the Labor Hire segment actually do? Broadly, labor hire can be described as a 'triangular employment arrangement', with the labor hire agency directly employing labor and contracting that labor out to customers for a fee. For the avoidance of doubt, labor hire firms pay the individual employees (the labor hire workers) their wages (rather than the firm where labor is being provided).
This arrangement is depicted below:
Source: CLSA - PeopleIn Initiation Report (5.11.22)
Again, the Company is mainly focused on blue-collar labor hire. An example of an Action Workforce job that the Company is hiring for right now is below:
This is a low margin, but highly profitable business with minimal capital requirements, benefits to scale (some network effects, ability to service large clients, operating efficiencies, etc.), and, importantly, sticky customer relationships. Ashley has an average relationship of 8.2yrs with its top 20 customers (although volumes can and do fluctuate based on customer needs). Despite this, it's worth noting that customer concentration is a risk - Two major customers make up 17% and 12% of the Company's total revenue, respectively.
The Company's customers are almost exclusively large, blue-chip clients in industries with variable manning requirements. Ashley and other labor hire firms provide customers with the flexibility to manage their cost bases through cyclical peaks and troughs, NOT as a wage reduction strategy. Employees, in turn, use labor hire services given the ease of obtaining work.
Source: CLSA - PeopleIn Initiation Report (5.11.22)
These dynamics, coupled with a tight labor market (4.0% unemployment rate in Australia as of May 2024), have driven labor hire employment as a percentage of total employment to grow over the past decade.
Labor hiring is therefore a growing industry. Australian labor hire jobs saw a 4.5% CAGR from 2012-2019 vs. a total job CAGR of 1.6% over this same period. I would expect this trend to continue, despite recent regulatory changes in Australia related to the industry, given customers' need for flexible, additional staff.
Source: CLSA - PeopleIn Initiation Report (5.11.22)
While not specifically broken out by the Company, I estimate that Action Workforce, Ashley's largest brand, has grown revenues at a ~7.5% organic CAGR from FY16-FY23 (fiscal year-end 6/30), implying market share growth vs. the rest of the industry. I would estimate that Ashley can grow at least in line with historical industry growth going forward.
A Word from our Sponsor: Commoncog
We know the best investors read a lot. But HOW do they learn from what they read? And why do they read so much history? This is a free series of essays that draws from expertise research to explain how you, too, can learn like Charlie Munger.
Situation Overview
Since February 2023, the Company's stock is down ~70%. What happened?
One issue is simply macro factors - Given its exposure to blue-collar, supply chain and logistics-related labor, Ashley is exposed to cyclicality. In H1 FY24, the Company saw a revenue decline of ~1% YoY (excluding acquisitions), driven by a 5% decline in underlying hours charged YoY as a result of weakness in the warehousing, logistics, and retail segments, particularly in the seasonally strong October to December period (as demand post-COVID cools off), offset by inflationary increases in underlying wages passed on to customers.
Analysis of international staffing and recruitment competitors with operations in Australia shows continuing pressure in the industry going into Ashley's H2 period, although there is some suggestion of stabilization QoQ:
Source: Ord Minnett - PeopleIn Report (4.29.24)
More importantly, the Company saw Labor Hire EBITDA margins decline from 4.3% in H1 FY23 to 3.1% in H1 FY24, driven in part by the negative impact of fixed hourly margins in the current inflationary environment (i.e. increasing labor costs that have not yet been passed on to customers). However, given the aforementioned labor hire industry dynamics, I expect the Company will be able to pass on higher employment costs as contracts renew and inflation cools.
Another major issue is the Company's disastrous Linc Personnel ("Linc") acquisition. As part of its efforts to diversify into higher-margin end-markets, Ashley acquired 75% of Linc, an oil and gas labor hire firm, for AU$4.2m (~4x EV/EBITDA) in July 2022. In October 2023 (just 15 months after acquisition close), it was announced that Linc had lost its major customer and that Linc earnings would be negligible going forward.
Not only was this impactful on the Company's financials (Linc represented 10% of the Company's net profit after tax in FY23), but it also called into question management's competence, their approach to due diligence, and their current strategy of expanding into new end-markets in an already difficult macro environment. These are all fair, but it's worth keeping in mind that customer losses do occasionally happen in this business.
Finally, Richmond Hill Capital ("Richmond Hill"), the Company's second-largest shareholder behind CEO Shrimpton, almost entirely exited the Company's stock from August 2023 to March 2024. Prior to August 2023, Richmond Hill owned 11.5% of the outstanding common equity. We don't know why Richmond Hill decided to sell its stake, but this obviously placed pressure on the share price given Ashley's illiquid stock.
In March 2024, CEO Shrimpton purchased ~4m shares at a price of AU$0.21/share, representing AU$841k and 3% of the Company (taking his ownership up to ~59%). Given the illiquidity of the Company's stock, I assume this was a negotiated purchase from Richmond Hill. Regardless, I find this to be a significant signal - From what I can tell, this is Shrimpton's first on-the-market purchase since February 2016 (when he bought a much smaller 550k shares).
Analysis
I estimate that Action Workforce makes up 70-80% of the Company's total Labor Hire revenue. What is a business that is organically gaining market share (in an industry that has historically grown at a 4% CAGR) with minimal capital requirements, sticky customer relationships, but cyclical end-markets worth?
My calculation of the Company's enterprise value and valuation multiples are below:
Note: EBITDA is adjusted for IFRS-16 (lease payments are deducted from operating profits). 'Normalized' revenue calculated as RR Training H1 FY24 revenue plus RR Labor Hire H1 FY24 revenue arbitrarily lowered by 25% to reflect expected slowdowns in the Company's main end-markets less $15m in Linc revenue contribution. 'Normalized' EBITDA calculated as RR H1 FY24 corporate costs plus RR Training H1 FY24 EBITDA plus Labor Hire EBITDA calculated under an arbitrary 2.5% EBITDA Margin (vs. 3% Labor Hire EBITDA margins in H1 FY24). Normalized EBITDA is ~50% below FY23
Ashley is clearly too cheap based on FY23 numbers, however the Company is unlikely to produce at those levels for some time going forward. Based on my assumptions, a more realistic valuation is ~7.5x normalized EBITDA (reflecting a 25% decline in the revenue base from current levels, representing my estimate of 'trough' earnings).
That's an attractive valuation for the Company, particularly given a historical FCF to EBITDA conversion of ~55%, implying an ~11.2% FCF yield. The Company has historically returned ~80% of FCF to shareholders as dividends. This, coupled with 4%+ organic revenue growth, could drive mid-teens stock returns over time with no multiple expansion.
However, I currently have two concerns with Ashley:
My normalized revenue and EBITDA estimates are relatively arbitrary
More importantly, the Company's debt profile is elevated following recent acquisitions and investments into the business. The Company historically produces the majority of its FCF in H2 of the year, but the Company's current working capital position gives me pause as to whether that will be the case this year. Net of run-rate H1 FY24 interest expense, the Company's FCF yield is a much skinnier 5.9%
I don't think debt is a long-term issue for the Company - The overall debt profile appears manageable and the CEO has historically been willing to provide incremental financing through debt provided by his own financing vehicles rather than dilutive equity raises. That said, an investor in Ashley today could see the majority of their capital diverted to debt paydown over the coming years over shareholder returns through dividends.
I do think Ashley is trading attractively at the moment, but I'll be waiting for the next earnings release (expected in the coming months) to get a better sense of the Company's capital position.