HIRE Technologies is a Buy, says Eight Capital

Better than expected quarterly results are good enough for Eight Capital analyst Christian Sgro to maintain a “Buy” rating on HR and staffing tech company HIRE Technologies (HIRE Technologies Stock Quote, Charts, News, Analysts, Financials TSXV:HIRE). Sgro reviewed HIRE’s second quarter numbers in a Wednesday Comment where he said a strong-looking labour market should support growth for HIRE.

Toronto’s HIRE Technologies is a digital HR company comprised of a network of staffing, HR consulting and IT firms, with the overall aim being to consolidate the fragmented HR market across North America. HIRE went public in December 2019 and the stock rose sharply over the first year of trading, effectively doubling during that time span. But it’s been downhill since then, with HIRE dropping from $0.82 per share to start 2021 to now below the $0.10 mark where it’s mostly been trading over the past three months.

But Sgro sees a better outlook for HIRE and he has raised his revenue estimates on the back of the company’s recent financials.

HIRE released its second quarter 2022 numbers on Monday, reporting revenue of $9.4 million compared to $6.4 million a year earlier. The Q2 represented HIRE’s seventh consecutive quarter of sequential revenue growth, with the company attributing $1.3 million of the quarter’s revenue to acquisitions and the rest to organic growth from its on-occurrence permanent placement and recurring contract books businesses, which were up 58 per cent and 14 per cent year-over-year, respectively. Adjusted EBITDA for the quarter was $0.3 million compared to a loss of $0.6 million a year earlier.

“Our brands benefitted from strong client demand in the second quarter,” said CEO Simon Dealy in a press release. “Demand outstripped the supply of talent in HIRE’s key industry verticals, and we were able to maintain industry leading organic growth. With the unpredictability of financial markets near-term, it is important that we now focus on positioning the Company for sustainable long-term growth.”

Comparing the results with his forecasts, Sgro had called for revenue of $8.8 million versus the realized $9.4 million, while HIRE’s $0.3 million in EBITDA was more or less in line with Sgro’s call at $0.4 million. Gross margin of 53.8 per cent was also better than Eight Cap’s call at 48.4 per cent, with Sgro pointing to a larger mix of high-margin permanent and executive placements at 44 per cent of the total.

“HIRE reported Q2/22 revenue ahead of our estimate, citing healthy organic growth despite a disciplined approach to turning away excess demand in lower margin verticals. The permanent placement business was an area of strength, reflective of the strong labour market,” Sgro wrote.

“We expect the recurring contract business to be resilient in the longer-term with the potential for the labour market to evolve over the next 12 months. As management looks to preserve cash on the balance sheet, we expect a continued emphasis on profitability and disciplined growth,” he said.

Looking at the macro picture, Sgro said unemployment numbers continuing to be at record low levels are acting as a partial offset to the seasonally lower Q3 for HIRE where summer plans slow staffing decisions. 

“Management noted that in a softening labor market, the staffing industry and particularly the recurring contracts business offers customers a good alternative to taking on too many full-time employees,” Sgro wrote.

Sgro rejigged his estimates on HIRE and is now calling for full 2022 revenue of $35.6 million compared to 2021’s $27.7 million and moving to $37.4 million for 2023. On adjusted EBITDA, he is expecting HIRE to go from $0.1 million in 2021 to $2.3 million in 2022 and then to $2.9 million in 2023. 

On the company’s cash flows, Sgro remarked that HIRE exited the Q2 with $0.5 million in cash and $4.2 million in debt on the balance sheet, saying, “As the company laps the two-year anniversary of several acquisitions, we see the potential for earn- outs to arise through the year. We expect the company to work with the selling shareholders (who in most cases continue to operate acquired business units) to arrange the appropriate mix of equity and debt.”

On valuation, he sees HIRE’s EV/Sales multiple staying at 0.3x for both 2022 and 2023 while its EV/adjusted EBITDA is expected to go from 4.2x in 2022 to 3.3x in 2023.

With his “Buy” rating, Sgro has also reiterated a 12-month target price of $0.20 per share for HIRE, which at the time of publication represented a projected return of 186 per cent.