Buy Healthcare Locums - argues Rob Cullum, editor of TrendWatch

One key principle that underlies the TrendWatch investment strategy is that we normally only ever recommend shares that have just started a new uptrend. For the first time since the global credit crisis blew up, weve been forced to research more mature uptrends to find shares that satisfy our high standards. Fortunately, weve found a good un.

It wont be news to many investors that healthcare staffing in the UK is big business, but its quite an eye-opener nevertheless to be reminded just how big. The most recent figures available indicate that the staffing market was on course for an annual total of 5 billion.

Apart from the sheer size of the NHS, a number of factors contribute towards this huge figure: the desire for more flexible working conditions by staff, past failures to invest in the training of a sufficient number of specialist staff, the implementation of the Working Time Directive. But lying behind all of these are the demands of an ageing population, medical advances and also the fact that the vast sums sucked into administration actually seem to boost the need for external support, rather than the reverse.

The NHS accounts for around 45% of the total spend, but with another figure of 45% emanating from the provision of homecare staff. Demand for recruitment services provided by private-enterprise intermediaries such as Healthcare Locums is unlikely to be threatened by superbly organised and far-sighted direct recruitment policies of the client organisations such as the NHS, if you catch our drift.

Healthcare Locums, now four years old, is a group supplying specialist healthcare professionals to both the NHS and the private healthcare sector.

Its ruling ethos is the focus on higher-margin, longer-term specialist staff such as doctors, social workers and allied health professionals (AHPs), rather than the placement of nurses, for example. Working from two call-centres the group avoids the requirement for a costly high-street presence. The admission document argued that being able to supply staff nationwide without a local branch network enabled higher margins still.

This ethos means that, whilst it has lower volumes, there is a higher average transaction value and, in general, placements are longer term. Demand is not as immediate; and the overheads to service this market are therefore lower. It has an expanding database of registered locums across all specialties. Nearly half of these placed by the company at the time of its original flotation were from overseas; and the company had established an international recruitment division with 23 international partners across Europe, the Middle East, Australia, South Africa, New Zealand, the USA and Canada. This is a two-way trade placement outside the UK is a growing area of business.


On flotation, it comprised four discrete significant entities, brought together through acquisition.

the decade-old Thames Medics, a specialist in providing GPs, doctors and psychiatrists to the NHS and private hospitals. This was followed by
Eurosite Medical, a provider of AHPs to the same client groups. Then came
Medical Technical, a specialist in support staff (plaster technicians, sterile services technicians, phlebotomists and the like). This added scale, and also reach, enabling the group to access the supply of operating theatre technicians. Finally
Recruitment Specialist Group extended coverage to qualified social workers.
In November 2005 the company raised 13m at 55p. Six months into public life, it bought BBL for a total consideration of 10.5m, with 5.0m immediately payable in cash (financed by banking facilities) and a further 3m to be satisfied at completion by the issue of ordinary shares. 75% of BBL's income came from recruitment of hospital doctors; most of the rest came from recruitment of GPs.

After almost exactly a year as a public company, it raised 16m in the market at the same 55p price to acquire Blue Group, one of the leading qualified social-work agencies in the UK, for a maximum of 14m - with 10m payable in cash on completion. Blue Group's turnover in 2006 was 36m, and it was reckoned to have 15% of the market in Qualified Social Work (QSW) agencies. The acquisition was a three-way fit: First, Blue also had no branch network; the plan was to integrate the call centres. Second, the back-office integration was expected save 1m a year, starting in 2007. Third, it would help Healthcare Locums' intent of achieving a 33% split between its three core markets - AHPs, doctors and QSWs.

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This history makes the most recent figures for the 100m company irrelevant but the forecasts compelling (see table below).

2006 2007 2008*
Revenue (m) 64.63 144.1 169.50
Pre-tax profit (m) 1.08 12.40 16.90
Earnings per share (p) 7.10 9.00 12.30
Dividend per share (p) - 1.50 2.60

*Forecast
The main figure of interest in the 2006 accounts was the 16% organic growth. But the picture was clouded because it coincided with another substantial acquisition, JCT Locums, for 5.5m cash.

Current trading is robust and in line with management expectations, with one of the key drivers still being that of organic growth. The company is now market leader in each those three specialist divisions (AHPs, doctors and QSWs), and is very close to delivering the one-third income split targeted by the board. It says it will now cease strategic acquisitions so as to concentrate on integration.

The chief executive and 10% shareholder is Kate Bleasdale, a former nurse (ironic, given that her company avoids the nursing recruitment market). More importantly, however, shes a first-class businesswomen with a distinguished entrepreneurial history, and (by way of a footnote) a record-holder for the award of 2.2m damages when she sued her previous company for sex discrimination.

Performance to date has been dazzling; but it we should recognise that, with 13 acquisitions all told, this has, in a sense, been the easy bit. And with debt now running at 34m, up to nearly 6m to be paid out by way of deferred consideration and 67% of sales emanating from the NHS, the company may be a bit boxed-in.

Nevertheless, heading for earnings per share of 9p this year and 12.3p next works out to 12 times earnings in immediate prospect, falling to about 8.5 next year. These numbers leave plenty of medium-term price headroom. BUY

It's still nice to get in somewhere near the bottom, though I think that technically you should wait for a tick up on the graph before plunging in, otherwise you are trying to catch 'a falling knife'. I don't know any other way of trying to predict the bottom other than using a graph.

so why has this fallen so badly today. I understand the accountancy change, but solid business and outlook...seems overdone, or am i missing something ?

in this times big boys dumping everything wich price going down.simple.they've got just 3months view and have to make some cash for naive clients in that time,so because they about price not value they dump it if price going down and go somewhere else.hyennas.

Presumably a load of stop losses triggered, though maybe went down too fast to have registered.

I can find no other reason(s) for the sp fall other than the change of accounting has resulted in results coming in below expectations, and the fact that the results are a day late. Unless we are being kept in the dark about something sinister the business appears to be very 'healthy' (sorry!) and growth should continue to be strong.

A million just gone through @148 - total shares (Ithink) @103m - so 7% so far today.

its probably aversion to booking future profits, ENRON did similar model

From KBC Peel Hunt:
"Accounting change: Historically, the US International permanent placement
revenues were recognised at three stages (a third on acceptance of job, a third
when they passed the US conversion course, and a third when they get the
visa). However, HLO will now recognise revenues more closely to the cash
receipts (a third on acceptance, a third on passing exams and a third on starting
the post). For Middle East placements the revenue recognition change is from
point of acceptance to the start of post. The impact on 2009 is modest but, given
the growth in International in 2010, our headline PBT (including share-based
charges) moves from 42.4m to 38.0m, with EPS moving from 29.0p to 25.9p.

Attractive investment case: We believe management has successfully derisked
the equity story (international position established, reporting/operating
platforms streamlined, efficiencies secured). However, HLO is still positioned for
strong earnings and free cash flow growth (97m generated over our three-year
horizon). We consider that, with the shares trading on 8.5x 2010E EPS for 32%
CAGR EPS growth and yielding 3.6% on an 8p 2010 dividend, these many
attractions are still to be reflected in the rating. Buy."

From Arbuthnot:
"A day later than expected, Healthcare Locum's results contain a change in accounting policy, which results in the group missing our full-year forecasts.

The group is changing its accounting policy to recognise revenue when a candidate starts a position (as opposed to when a candidate accepts a position). This is due to the growing international contribution of revenues, which results in a longer delay between agreeing a position and starting (up to four years in the US due to visa requirements).

As a result of this accounting change full profit is adversely impacted by c.10m, with PBT +41% to 23.2m (26% below our 31.3m forecast), EPS is +37% to 16.0p (23% below our 20.9p) although the DPS is 5.0p (vs. our 4.0p). Net debt continues to fall and now stands at 17.3m down from 26.9m last year but is above our 14.2m forecast.
While a more prudent accounting policy is clearly required given a growing international contribution, and should more closely align with cash flow, the acknowledgement that the prior policy was becoming increasingly inadequate and the manner in which this has been communicated to the market will not aid sentiment with regards to the stock.
In terms of outlook, the group cites a robust start to 2010 across all divisions. However, it is likely that the adverse impact both financially and with regards to sentiment will dominate the stock today. We reduce our recommendation from Buy to Neutral (lowering our price target to 190p from 285p) and will revisit our financial assumptions at a later date"

Last one is a cautionary note from Evolution:
"EVO TAKE The Market will initially focus on the change in accounting policy, though we think attention will soon turn to the evaporation in growth in the Locums business.
DETAILS Locum revenues grew by a meagre 2.1% YoY. However, sequentially locum revenues declined 2.8%. The weakness was driven within the Social Workers operation, with revenues falling from 21.6m (1H09) to 15.5m (2H09). Gross profit from Social Workers was sequentially down 30%. The other locums operations (Doctors and AHP) have also seen next to no sequential growth in gross profit. As our recent note highlighted (Staffing recovery underway, Feb 2010), we are also cautious on the prospects for gross margin and anticipate the NHS will increasingly scrutinise the commissions agencys charge for the provision of temporary staff. Revenue (for the International business) is now recognised on the start date of the candidate (was previously on acceptance)."

In auction again!

Flying :-)

Sucker bounce????

Probably.

Healthcare Locums crashes


Healthcare Locums was in turmoil as shares crashed by 31 per cent after the company's already late full-year results revealed that the 2008 accounts have had to be restated, with nearly 2m wiped from last year's sales. This combined with weakness in some of the company's home markets sent investors scurrying for the exits.

The problems stem from when to book the placement of international staff as a sale. In a practice one analyst described as "aggressive", such sales were booked when an international candidate accepted a post. But it seems that visa applications and non-starters can delay payment times, especially in the US, and so Healthcare Locums will now book the successful placement as revenue when employment actually begins - in effect pushing back years' worth of predicted sales growth.

Operationally, sales at the locum doctors and qualified social workers division were flat at 55.2m, held back by lower sales in the second half, while gross margin increased by 3 percentage points to 26 per cent.

KBC Peel Hunt revised its 2010 pre-tax profit down by 11 per cent to 38m, with EPS of 25p.

Creative accounting by Healthcare Locums


British medical staffing firm Healthcare Locums Plc (HLO.L) on Tuesday posted a full-year pretax profit that was well below market expectations due to a change in its accounting for revenue, sending its shares down nearly 35 percent.

The company, which supplies staff to hospital and social services, also restated its previous years' results to reflect a new accounting policy for permanent placements.

"There are two things going on with the share price this morning. One, the accounting policy change that has an impact on profitability. But, there has also been a slowdown in the core locum business," Evolution Securities analyst Adrian Kearsey told Reuters.

The company's new policy, which will now recognise most revenue on the start date rather than when the candidate accepts a position, resulted in adjusted operating profit of 25.2 million pounds ($38.0 million) in 2009.

Healthcare Locums said it would have reported an adjusted operating profit of more than 31 million pounds if it followed its old accounting policy.
Arbuthnot Research analyst David Brockton said while a more prudent accounting policy was required given a growing international contribution, the acknowledgement that the prior policy was becoming inadequate and the way it was communicated to the market would not help investor sentiment.

Brockton downgraded the stock to "neutral" from "buy".

However, analyst Kearsey said the focus over the next few months would be on the core locum business, and not the accounting change.

Turnover from two of the company's three locum business segments, doctors and social workers, fell by 0.7 percent and 19.5 percent, respectively, in 2009.

"After the elections, whilst there will continue to be significant demand for temporary workers within the (National Health Service), the commissions paid to agencies could be looked at," Kearsey said.

Healthcare Locums said it looked forward to the future with confidence, helped by the passing of U.S. President Barack Obama's healthcare reforms.

For the year ended Dec. 31, Healthcare Locums posted a pretax profit of 17.7 million pounds, compared with 13.9 million pounds in the year-ago period.

Revenue climbed 5 percent to 172.1 million pounds.

Analysts on average were looking for a pretax profit of 31.0 million pounds, on revenue of 199.8 million pounds, according to Thomson Reuters I/B/E/S.
Healthcare Locums also declared a final dividend of 1.9 pence per share, bringing the full-year dividend to 5 pence a share, up from 2 pence last year.

Shares of the company were down 31 percent at 152 pence at 1216 GMT on the London Stock Exchange. They touched a low of 143 pence earlier in the session.

Where to now, that's the question? Just about everything I have read (Apart from Evo) seems to think that this is vastly oversold, so assuming most holders got caught out by the sudden drop, are still holding at a loss & assuming the business model is sound & therefore going to attract more investors at this price, the immediate 190 price target should be easily achievable.

I knew nothing about this company till I saw the chatter yesterday. Took the gamble at 145p which looked grossly oversold, went out for the day and have just sold at 173p.

Looks as though it may well go higher but a profit aint a profit till you've banked it so I'm quite happy which doesn't happen much on the SM these days!

come on baby...fly now :)