In a bear market people are looking for growth they can trust, and I believe that’s exactly what Healthcare Locums offers: attractive, but defensive, growth. The company is expanding rapidly both in the UK and abroad, and with 4 million vacancies in healthcare worldwide, there is plenty to go at. Unlike the rest of the recruitment sector, its business carries no cyclical risks. The shares are a steal on a current rating of 9.2, falling to 7.2.

The Business: Healthcare Locums recruits personnel in three key areas: doctors, qualified social workers (QSWs) and allied health professionals (AHPs). Each operating division has its own managing director, supported by central finance, marketing and IT infrastructures, all located in separate call centres – in Loughton, Essex (Allied Healthcare Professionals), Southwark, London (Qualified Social Workers) and Skipton, Yorkshire (Doctors). The group’s sales personnel are highly incentivised, with a 50% basic salary and 50% bonus commission scheme, coupled with a share option scheme. Crucially for a recruitment firm, this has led to a low staff turnover at consultant and team leader levels.


Although most recently growth has been purely organic, in the past it has been highly acquisitive, with the company having made 13 bolt-on acquisitions in just a few years’ time. This approach has proved highly successful, as the management has proved itself adept at quickly integrating acquisitions through introducing centralised systems, procedures and financial structures. This proficiency at smooth business integration is one of the company’s key assets and should continue to serve it well in the future, especially if Healthcare Locums decides to take advantage of the current depression in market valuations.


Although it can be said that the company is weighted towards the NHS, which accounts for around 60% of revenues, it also has a strong and growing presence in the private sector, particularly in retail and pharmaceuticals. This is complemented by a rapidly growing international business, with a significant presence in both the US and the UAE. These two markets represent huge growth opportunities for Healthcare Locums: for example, in Dubai, up to 40,000 staff are required for just one developer’s hospital projects; in the US, there are an estimated 400,000 vacancies in the permanent nursing market.


Industry fundamentals The word ‘defensive’ seems to suggest low or sedentary growth rates to investors, yet this is far from the truth when it comes to Healthcare Locums. For starters, the long-term demographic outlook in the UK is conducive to growth for firms like HL. Demography experts suggest a peak in the UK retirement versus working population by 2012, which means a lot more demand for healthcare workers. At the same time the way in which the NHS sources staff is evolving, with Master Vendor Agreements, which tend to favour larger firms (like HL) and limit competition, having recently become the norm. Supply shortages in the UK mean that 70% of locums placed by the company are now international workers, which is feeding a two-way business for HL.


Recent Performance The company is increasing revenues and profits by the month. The current annual run rate turnover has increased from £160 million at the time of the preliminary results released in April 2008 to £173 million at the time of the trading update in July, while the gross margin run rate has increased from £36 million to £46 million over the same period. All three divisions are performing well and experiencing strong demand for their services. Meanwhile, trading at the group’s international placement operations has begun well and is building momentum on the back of some significant contract wins, including one with Emaar Healthcare, one of the leading hospital builders in the Middle East.

Financials This year the company is expected to achieve net fee income (gross profits) of £51.6 million on turnover of £185.2 million, giving pre-tax profits of £18.6 million and earnings per share of 12.8p. In 2009, PBT should hit £23.3 million giving earnings per share of 16.3p, which implies a forward rating of just 7.2 for the shares.


Although, due to recent acquisitions, the group is fairly highly geared at around 67%, net debt of £31.7 million at the end of March 2008 represents an improvement on the figure of £35.3 million for the end of 2007. However, with interest cover at almost 8 times, debt should not be an issue for investors.


Despite achieving net operational cash flow of £5.7 million in 2007, nearly £20 million of investing activities (assisted by new loans) meant an overall £8.5 million net decrease in cash during the period. The company is expected to move into positive overall cash generation during the current year, which should prove a catalyst for the shares.
Conclusion


Healthcare Locums is demonstrating strong levels of growth in a market that is practically insulated from the wider economic downturn, yet the shares appear to be rated in line with the rest of the recruitment sector, which does not share HL’s defensive qualities. For a relatively low-risk investment that still holds the potential for attractive levels of return, Healthcare Locums is just what the Doctor ordered. Buy.