The ‘significant’ case for Pinnacle Staffing

For this week’s recommendation, Pinnacle Staffing, I am grateful to a friend who is obsessive about reading company announcements and letting nothing escape him. ‘Have you looked at Pinnacle Staffing’s trading update in January?’ he asked. I confessed I hadn’t. ‘You should,’ he said, ‘and look for the word “significant” on the first page.’

Intrigued, I decided to take a look. Pinnacle Staffing is a newcomer, having joined AIM as recently as last September, when it was demerged from Nestor Healthcare. It is not hard to see why Nestor wanted to get shot of it. The admission document shows the business – which supplies nurses, locum doctors, carers and other professionals to both the National Health Service and the private health sector through 33 branches across the country – was shrinking.

Turnover fell from £182 million in 2003 to £103 million in 2005. Over the same period, operating profits shrank from £12.4 million to £2.66 million. One reason is that, since 2003, NHS expenditure on temporary nurses has fallen. More former nurses have been encouraged back into full-time employment and the NHS has set up its own in-house staffing operation, called NHSP. Other changes have not helped.

Nonetheless, the public and private sector combined continues to spend the best part of £2 billion a year on temporary staff in this area – and demand from independent hospitals is rising year-on-year. With the transfer of three-quarters of the NHS budget to primary care trusts (PCTs) two years ago, increased demand has also come from the GP end of the market. PCTs are expected to increase their use of commercial bureaux, such as the businesses Pinnacle owns.

Be that as it may, the market is certainly not putting much of a valuation on Pinnacle’s £100 million or so turnover. With the shares currently 8.88p (spread: 7.5p-8.25p), the company is capitalised at less than £8 million. The trading range since September has been between 6p and 11p.

One reason for the lowly rating has been the need for index funds to sell shares. Nestor holders were simply given Pinnacle shares pro-rata to their Nestor holdings. But Pinnacle is way too small for index funds to hold – hence the selling. But while that has been going on, it looks as if one or two people have picked up quite considerable blocks of shares.

Back to the January trading update. This said the board was confident of producing an operating result in line with the ‘current trading and prospects’ section of the AIM admission document. Sadly, that leaves us little wiser, for the September statement merely referred to a slow second quarter and delays in getting a new contract – worth £4 million a year – from the North Central London Strategic Health Authority up and running. Costs had also been cut, but the outlook was for figures ‘moderately’ below management’s expectations (whatever they were!).

But the January statement made it clear the management had, since the demerger, taken an axe to costs and was getting more out of existing contracts. The company had also generated good cash flow. And here comes that word ‘significant’. At the time of the demerger, Nestor saddled the business with a £5 million debt – which it wanted repaid pretty quickly. The January statement says Pinnacle has ‘already repaid a significant amount’ of this debt.

Now that is good going in just four months. How big is significant? That we won’t know until the company reports its figures for the period from 5 September (demerger day) to the end of the year. That will happen on 27 March. But if Pinnacle has managed to repay, say, £1 million or so out of cash flow in so short a time, it must clearly be making good money.

The outlook for the coming year is bright. Pinnacle managed to get all three of its operating companies on the new NHS approvals list for nursing staff. This has reduced the number of suppliers from 121 to 51. So those remaining should get a bigger slice of the pie.

If the figures on 27 March show annualised profits running at anything near the previous level (of £2 million-plus) it would leave the shares selling for about five times earnings – and this in a sector where there has been huge consolidation. Pinnacle is one of the leading names in the game. It owns the British Nursing Association, whose origins go all the way back to the founding of the NHS in 1948. It could very easily become a target for a third party.

Clearly, there are a lot of unknowns. But with a young and incentivised management, Pinnacle could perform a lot better than its track record under Nestor would suggest. Meanwhile, the selling by index funds looks to have run its course. Buy.