Eight Capital analyst Christian Sgro remains on board with HIRE Technologies (HIRE Technologies Stock Quote, Chart, News, Analysts, Financials TSXV:HIRE), maintaining a “Buy” rating and target price of $0.55/share with a potential return of 77 per cent in an update to clients on Thursday.
Headquartered in Toronto, HIRE Technologies offers full-time, part-time and temporary staffing solutions in the light-industrial, waste management and healthcare sectors.
Sgro’s latest analysis comes after HIRE reported its third quarter financial results, which Sgro noted to be strong. The results were headlined by $7.7 million in revenue for the quarter, producing 21 per cent sequential growth and a 203 per cent year-over-year increase, while also outstripping the Eight Capital estimate of $6.8 million thanks to both the recurring contract and on-occurrence permanent placement segments outperforming their targets.
“The company pointed out a talent scarcity and hybrid working models which continue to act as tailwinds for the staffing sector,” Sgro said. “As well, the company continues to see US customers reaching North for talent, capitalizing on remote work models and FX arbitrage.”
HIRE’s gross profit also came in as a beat, with the company reporting a 44 per cent margin ($3.4 million) to beat the Eight Capital projection of a 41.3 per cent margin ($2.8 million) and secure a 5.5 per cent sequential increase.
Sgro partially attributes the margin beat, which excludes any government contribution, to HIRE’s acquisition of Leaders and Co., an executive search firm with domestic and international operations, which closed on August 27 for $5 million; the acquisition also helped HIRE expand its operations into Quebec.
Adjusted EBITDA also came in ahead of expectations at a 3.7 per cent margin ($300,000) compared to the Eight Capital projection of a $100,000 loss in the quarter, as well as significantly outpacing the $600,000 adjusted EBITDA loss reported in the previous quarter, with Sgro attributing the beat to decreased operating expenses as a percentage of sales.
“HIRE achieved another record quarter, driven by the organic growth of our portfolio companies as talent recruitment remains strong across practically all sectors,” said Simon Dealy, HIRE’s Chief Executive Officer in the company’s November 23 press release. “The past year has brought about many catalysts in human capital management, including a surge in demand for labour, competition for quality talent, a focus on diversity, equity and inclusion, and steady growth across many industries.”
“Looking ahead, we are encouraged by positive market dynamics into the fourth quarter and 2022,” Dealy added. “We are delivering industry leading growth rates and are confident in our ability to continue the growth trajectory of our business.”
HIRE’s quarterly results have prompted some revisions to Sgro’s financial projections going forward, including a slight bump to $27.3 million in revenue for 2021 (previously $26.3 million) for a potential year-over-year increase of 139.8 per cent, followed by a revised figure of $32.6 million for 2022, up from the $31.9 million initially projected and representing potential year-over-year growth of 19.1 per cent.
Sgro also projects an increase in the company’s gross margin almost immediately, projecting a jump to 48.7 per cent ($3.8 million) in the next quarter compared to the previous estimate of 46.9 per cent ($3.6 million), leading to an increased estimate of a 43.7 per cent margin ($11.9 million) for 2021 compared to the initial 42.5 per cent projection ($11.2 million). 2022 follows a similar trend, with Sgro raising his margin estimate to 49.9 per cent ($16.3 million) from 46.8 per cent ($14.9 million).
However, Sgro has slightly lowered his guidance on adjusted EBITDA to $200,000 positive for a 3.2 per cent margin in the upcoming quarter, putting the overall 2021 adjusted EBITDA projection at a slight negative (-0.1 per cent margin). Sgro then sees the EBITDA turning positive in 2022 at a 3.1 per cent margin ($1 million), up from his initial 2.6 per cent margin estimate ($900,000).
From a valuation standpoint, Sgro sees significant discounts in relation to HIRE, projecting the EV/Sales multiple to drop from the reported 2.4x in 2020 to 1x in 2021, then to a projected 0.8x in 2022, which is also the first year he produces a multiple for EV/adjusted EBITDA at 27.2x.
“While the company noted strong trends across the staffing industry, we remain cautious on seasonal headwinds that impact the Q4 quarter, including holiday slow-downs,” Sgro said. “As well, HIRE’s mix of financial services clients generally sees a pull-back in Q4, which we expect to rebuild into Q1. As such, we are modelling relatively flat performance into Q4 into what we expect to be a strong 2022.”
Overall, HIRE’s stock price is down 55.2 per cent for the year to date, reaching a high point of US$0.80/share on January 7.
In late September, HIRE closed on the second tranche of a non-brokered private placement for gross proceeds of about $2.8 million, with the company saying the proceeds will be used for general corporate purposes.
Disclosure: HIRE Technologies is an annual sponsor of Cantech Letter.