Randstad (Euronext Amsterdam: RAND) is one of the world’s leading HR services companies in the world and focuses on temporary staffing and finding permanent replacements for the work floor. This is a capex-light business, and as such, the free cash flows are usually very strong.


Randstad1 
Source: finanzen.net

An excellent fourth quarter sets the tone

Randstad’s revenue in the fourth quarter of 2016 increased by approximately 11% to 5.5B EUR, of which approximately 7% could be attributed to organic growth. The non-organic growth was caused by the consolidation of Monster Worldwide, which was acquired by Randstad on November 1, 2016.7

Randstad2 
Source: financial results

The operating profit in Q4 actually decreased by almost 20% to 198M EUR, but there were several one-time items which had a huge impact on this result. First of all, Randstad reported a 10.5M EUR integration cost (very likely related to the acquisition of Monster), whilst the one-offs increased by 15M EUR and the amortization rate of the intangible assets also increased by 6.1M EUR. If you would exclude all these one-time events, the operating profit would have been almost 230M EUR, or an increase of more than 10% compared to the final quarter of 2015.

So even though the Q4 net income also decreased by 13% to just 153M EUR, the adjusted income actually increased by 5% to 203M EUR, despite a much higher tax rate (22.7% versus just 18.5%). With a gross margin of 20% and an EBITA margin of 4.8% in Q4, Randstad should be pretty happy with its performance.

The improvement is actually even more visible in Randstad’s cash flow performance. The company’s EBITDA increased by just 1%, and the 28% decrease in operating cash flow in Q4 was predominantly caused by a reversed tax situation. Whereas Randstad received a 16M EUR refund in Q4 2015, it had to pay 30M EUR in Q4 2016.

Randstad3
Source: financial statements

So perhaps it’s a better idea to compare the cash flow statement on an annual basis, and adjusted for changes in Randstad’s working capital position, the operating cash flow came in at 729M EUR (versus 688M EUR in the previous financial year). Yes, the capex level increased by almost 50% to 94M EUR, but on an adjusted basis, Randstad generated a free cash flow of 635M EUR compared to 625M EUR in the previous financial year. And keep in mind Monster Worldwide contributed just two months to this result.

Expect further growth in 2017

First of all, 2017 will be the very first year Monster Worldwide will be consolidated in Randstad’s financial results for the entire financial year. This should provide a pretty decent boost, although we would expect Randstad to incur some additional integration expenses but these should be offset by the incremental revenue and cash flow. Also keep in mind Randstad expected annual synergy benefits of approximately 23M EUR related to the Monster acquisition later on.

On top of the higher revenue from Monster, Randstad has also completed the acquisition of BMC (a professional staffing company in the Netherlands) in January 2017, whilst it also gained control of Ausy which has become a subsidiary of the group as of at the end of January. Randstad has now launched a final offer to squeeze out the remaining few shareholders of Ausy, and this process should be completed soon.

Randstad4 

Source: company website

This means Randstad’s 2017 results will benefit from the contribution of no less than three additional pillars to the consolidated entity. Granted, there will be some integration expenses associated with all three acquisitions, but this will be a one-time event, and we would expect total synergy benefits of 35-40M EUR kicking in from 2018-2019. As Randstad will now focus to integrate these companies in its existing corporate structure, it has warned M&A activity in 2017 will be very light. That being said, the company still has a very robust balance sheet with a very low net debt ratio (of just 0.8 times its EBITDA), so it will be able to take advantage of opportunities.

Investment thesis

Randstad says it will have a calm year on the M&A front, but I wouldn’t be surprised to see some smaller tuck-in acquisitions. With a free cash flow of 635M EUR, Randstad currently has a free cash flow yield of 6.4%, even after the substantial increase of its share price. With a declared dividend of 1.89 EUR (up 12.5% compared to last year), the dividend yield is also very acceptable at 3.45%.

Randstad is a great, but cyclical business. It will perform well in years with a growing economy, but will be weaker during market contractions, which means the timing to acquire a stake in the company is important. It could be worth it to wait a bit and hope to be able to pick up stock in the lower-50’s, or alternatively, you could write put options to pocket the option premium whilst waiting for the share price to come down.

Disclosure: the author has a long position in Randstad, and plans to write an additional put option

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