Labour hire firm's growth path fast but erratic

Allied Work Force founder and managing director Simon Hull says the float will allow the company to move on in a better and more structured way. Picture / Dean Purcell

Allied Work Force is a company that has been growing fast for many years. But its pro-forma profit track record in recent years is patchy, as are those of the four subsidiary companies brought together for the $11.4 million float.

On the growth side, the number of hours the labour hire company bills has gone from just 65,000 in 1992-93 to 3.37 million in 2004-05.

The hours billed have grown every year in between and are projected to grow 30.5 per cent to 4.4 million in the year ending next March.

Sales growth has also been consistently strong at more than 20 per cent a year over the past three years, and the 21.4 per cent growth in sales projected for this year does not look too much of a stretch considering that growth last year was 27 per cent and the year before 26.6 per cent.

Another indication of the company's rapid growth is that eight of its 21 branches at March 31 had been open less than two years.

Until 2000, the company operated only in Auckland; it now has branches from Kaitaia to Dunedin.

It plans to open four more branches this year of which two are already operating.

The bottom-line result is forecast to jump an eye-watering 80 per cent to $2.7 million this year.

But much of that increase reflects the fact that the company is using the float proceeds to retire $3.55 million in bank debt and $6.13 million in loans provided by parties associated with company founder and major shareholder Simon Hull - so, of course, its interest bill will be eliminated.

Interest expense in the year ended March this year was $535,000.

The underlying increase is a much less, but still demanding, 33 per cent at the earnings before interest, tax, depreciation and amortisation (ebitda) level to $5.2 million.

Ebitda in the 2004-05 year more than trebled to $3.9 million, but the ebitda result for 2003-04 of $1.2 million represented a 42 per cent drop from the $1.7 million 2002-03 ebitda.

Another negative sign is that cashflow from operations in the 2004-05 year was negative $32,000, compared with a positive $84,000 the previous year.

The four companies forming Allied Work Force show an even more erratic pattern. AWF Regional made net losses in two of the past five years. Its latest result is a $1.16 million net profit, compared with a $563,000 net loss the previous year.

AWF Auckland made a $26,000 net loss in the latest year compared with a $436,000 net profit the previous year and a $1.08 million net profit in 2002-03.

In July last year, the company bought Wellington-based Quin Workforce for $3.63 million. Looking at Quin's accounts, that suggests a very ritzy price. The accounts show a net profit of just $80,000 for the latest year, down from a $367,000 net profit the previous year.

The company bought Far North Labour Hire, which has been operating since September 2002, for $400,000 in August last year. Its accounts show a $38,000 net profit for the latest year, up from just $1000 the previous year.

Hull said the AWF accounts reflected the costs of growth. "Before we started opening branches at such a rate, the profit was higher. The reason for that is the investment in growth and people. That has been a conscious, planned process."

He said the company was now poised to start reaping the rewards of that investment, which included a considerable investment in information technology.

Despite the continued rapid growth, Hull said the risks of the company coming unstuck were now much less than when it began its present growth phase in 2000.

"I think we're well past the risky stage. In the first couple of years, there was a learning process - which is not to say the learning process has been completed, by any means."

The business now has proven systems in place and experienced people opening branches to a proven formula.

It has added about 50 people to its now 90-strong staff since 2000. Before that, Hull and chief executive officer Greg Webster, who joined Allied Work Force in 1996, had managed the company between them. Since then, they have hired another six executives.

The most recently hired, chief financial officer Dave Sutherland, who joined in April last year, said the company used the statutory accounts for Quin in the prospectus and most of the profits had been stripped out at the year's end by the previous owners, so the accounts did not reflect the true level of profitability.

He said rather than the $80,000 net profit shown for the latest year, Quin's real contribution was in excess of $700,000.

Mark Somerville-Ryan at ABN Amro Craigs, the float's lead manager, said the latest year would have included write-offs and further investment in people and systems.

Hull said Allied Work Force effectively paid about 3.5 times ebitda for Quin and just under three times ebitda for Far North Labour Hire, "standard private company multiples".

Hull started the company in 1988 as a specialist supplier of casual labour to the construction industry. It has expanded into a wide range of other blue-collar industries, and construction now accounts for only 31 per cent of revenue.

One of the company's strengths is its diverse customer base of about 6000 businesses. The prospectus shows the 10 largest customers accounted for only 14 per cent of sales and no single client accounts for more than 3 per cent of revenue.

Hull said the company had a labour pool of about 8000 workers but, on a typical day, would have fewer than 3000 on contract.

His best estimate is that his company has between 20 per cent and 25 per cent of the market.

He is comfortable about the prospectus projections and feels that the company is meeting its targets.

Hull said the independent directors, chairman Ross Keenan, a former Qantas executive, and Ted van Arkel, a former Progressive Enterprises managing director, "had some big sessions" before signing off on the projections.

Hull's family trust will own 66.8 per cent of the company if the full $11.4 million is raised (the float is not underwritten) and his father a further 4.1 per cent. Hull, 45, has agreed to lock up his stake until six weeks after the company announces its 2006 annual results.

He has been criticised for not having a longer lock-up period, but insists the float is not the first stage of an exit strategy.

"This is not an exit strategy. I want to hold on to two-thirds of my company. It's going to allow the company to move on in a better and more structured way.

"It opens a huge raft of opportunities for us."

Who, what, where

Allied Work Force head office: 41 Station Rd, Penrose, Auckland.

Profile: The company contracts out blue-collar casual labour to a wide range of industries including construction, warehousing, transport, manufacturing and food processing.

Post-float market capitalisation: $39.2 million.

Results: On a pro-forma basis, the company is forecasting net profit will rise from $1.5 million in the year ended March this year to $2.7 million in the current year.

Management: Founder and managing director Simon Hull, chief executive Greg Webster, chief financial officer Dave Sutherland, national sales manager Mark Douglas, IT manager Jassen Elliott, Auckland general manager John Robbins, regional general manager Alan Roberts and health and safety manager Briar Snelling.

Major shareholder: Simon Hull's family trust with 66.8 per cent.