Last week, I bought a new position for my long-term portfolio, Vmp. I’ll write something down so I remember why I bought it:
The case starts with where each person sees value. Some want to buy close to or below book value, some want quality, high dividends, etc. I personally like growing dividends and undervalued earnings growth potential. The staffing services sector’s revenue in Finland is approximately €2.8 billion. Vmp’s estimated revenue for 2020 is €325 million. Due to the simple business logic of the staffing sector, acquiring companies is easier to integrate than average. The company’s owners include Sentica (which, by the way, has recently bought Vmp shares). Sentica’s former holdings include Kotipizza and Pihlajalinna. Sentica was involved with Kotipizza from 09/2011-02/2017 and Pihlajalinna from 12/2009-05/2016. The ownership list supports the probability of successful inorganic growth. Sami Asikainen (CEO) is the 5th largest owner with 404,000 shares.
Earnings are pressured by high goodwill write-offs, which is why the company apparently intends to list on the main list, likely in H2/2020. One would think, looking at the ownership list, that the company would be sold by throwing out quite aggressive growth targets. With adjusted earnings, ROE is approximately 19%, book value €3.79. If ROE is 19%, growth 6%, required return 12%, then FCF is €0.53, value €8.84. Investment ratio would be 31%, dividend payout ratio 68%, and dividend €0.36. The share price is around €5.
Inderes’ 2020 estimated adjusted EPS is €0.82. At a price of €5.10, the P/E would thus be 6.2. So, if the 2020 EPS estimate were off by -50%, the company’s P/E would be 12.4! A company whose revenue has grown from 2016 → 2020e: €90 million → €325 million. The economic cycle has favored the company, and valuation based on peak earnings should be around P/E 9, but in my opinion, we can already talk about a sufficient margin of safety here. +Growth will be sought inorganically, and a low-interest-rate environment supports this. Savings from the integration of Smile have already been seen, so one can be quite confident with those as well.
Mainly, it’s the valuation that attracts me to Vmp. If the company grows at any pace in the future and gains investor awareness, there’s a double leverage in earnings/valuation. In times of low interest rates, an inorganic strategy is worthwhile, and the owners have a track record. The dividend is also at a good level for a growth company and is increasing. We await the new strategy and financial targets with interest.
A minus is the cyclicality of the business, but I think this has already been “sufficiently” priced in.
It turned out to be a bit too optimistic of a ramble, but what can you expect when I’ve acquired this for my portfolio. Others should make their own purchasing decisions independently.
