John R Exley III
July 13, 2016
CEO at Acorn Management Partners LLC

Staffing 360 Solutions (NASD:STAF)

COMPANY OVERVIEW

Staffing 360 Solutions, Inc. (“STAF”) is an international staffing services provider embarking on a rollup acquisition model with a near-term goal of reaching $300 million in annual revenue. The Company focuses on staffing companies located in the US (primarily on the east coast) and the UK that service one or more of its five pillars: Accounting & Finance, IT, Engineering, Administration and Light Industrial. Operations at STAF are conducted through its Monroe Staffing, Longbridge, PeopleSERVE, Lighthouse, The JM Group, and Control Solutions International divisions.

Other than serving the sectors listed above, STAF looks for acquisition candidates that are located in the same geographic region, have a strong owner/operator, and are larger in size in terms of revenue (targeting at least $20 million in annual revenue). Management employs its Intelligent Integration approach to its acquisitions, which involve leaving the strong owner/operator in place to run the acquired company, keeping the existing brand name and adding “360” to the end to tie the acquisition to the parent, and doing some back office and IT integration to reduce operating expenses. This approach has been attractive to owner/operators as they are able to monetize their ownership in their staffing company while continuing to oversee its growth as part of a larger staffing firm with greater financial resources. With the notable exception of CSI, all the acquired operating companies are currently run by the owner/ operator the business was acquired from. Historically, STAF has used a mix of cash, restricted stock, promissory notes and relatively easy to attain earn outs to purchase new businesses, typically at prices around 3.5 to 6.0 times trailing EBITDA.

Staffing 360 competes primarily in the temporary staffing sector, with less than 5% of revenue coming from permanent placements. Building a diverse set of clients and maintaining strong relationships are key to the temporary staffing business as these relationships become the foundation for building recurring revenue streams. Management believes its Intelligent Integration approach helps maintain the rapport between clients and the staffing companies it acquires. As the Company grows, its reliance on specific customers lessen, with its largest customer accounting for roughly 5% of total revenue. In total, STAF has over 1,000 clients it actively bills providing minimal downside on the risk of losing clients.

Key Points

  • STAF is embarking on a roll-up strategy, having acquired seven white collar staffing firms with a mix of cash, stock and notes/earn-outs in the last three years. Management believes it can continue building the business through organic and acquired growth, potentially becoming an attractive acquisition target by a major along the way.

  • Pending the availability of cash from a financing, management has several staffing companies in its acquisition pipeline that, if all were to close, would bring Staffing 360 over its initial target of $300 million in annual revenue.

  • STAF has an experienced management team that employs its Intelligent Integration approach to its acquisitions, which in conjunction with selecting higher margin targets in fast growing staffing segments, has yielded organic revenue growth above industry averages.

  • Staffing 360 trades at a more than a two-thirds discount to comparable smaller publicly listed staffing companies and multiples paid for privately held staffing companies. They expect the Company will move more in line with its peer group in the coming quarters.

Valuation

Greenridge Global Equity Research is initiated coverage of Staffing 360 Solutions with a Buy rating and $6.00 target price back on 3/2016. Despite showing above average organic industry growth rates, the Company is valued at a significant discount to its peers, especially on an EV/Revenue basis. While it looks fairly priced on a trailing EV/aEBITDA metric, they note it is skewed given STAF’s recent move to positive aEBITDA and expect the continued growth in aEBITDA will be reflected with a higher stock price. We believe the Company will continue to trade at discounts to its peers until it works through it cash obligations and increases its aEBITDA margin. Greenridge Global Equity Research target price is based on an EV/aEBITDA multiple of 7.0 times there forward twelve month aEBITDA estimate of $6.65 million.


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