Although final bids for Transpacific Industries Group Ltd's (ASX: TPI) business in New Zealand are due by the end of February, the company is still considering an IPO. It will make the decision which way to proceed by March once it sees the bids.
It won't indicate how much it expects from the business sale, but the company has revealed that Transpacific Industries New Zealand FY 2014 guidance is for EBITDA of around NZ$100 million.
Over the past two years, NPAT has improved from $60.1 million to $86.2 million, however outstanding shares have increased 64% to 1.578 billion shares. Thus, EPS has been diluted from 4.59 cents per share (cps) to 4.36 cps.
Since 1 July 2013, the share price has risen 49% to $1.14 as the company refashions itself, selling off assets to concentrate on its Australian business. It is just a little under its $1.27 book value per share. Paying down its high level of borrowings would definitely help its bottom line, which if it did, could spring upwards. That is what the market is looking towards with its 26.1 PE.
Skilled Group Ltd. (ASX: SKE), the labour hire and workforce service provider, is working on growing with its plans to acquire T & C Services from Thomas & Coffey Ltd (ASX: THO) for $33.5 million. T & C Services provides maintenance and asset management services to the manufacturing, mining, heavy industry and utility sectors in NSW and QLD.
The company acknowledges the mining pullback will create challenges, yet NPAT grew by 82% over two years from 2011, up to $58.4 million in 2013.
It has a low gross gearing of about 12%, and with NPAT greater than its $56.4 million long-term debt, the company is in strong health, so acquiring businesses during weak markets is good for future growth. Its share price is up 13.6% since July 2013 and PE is 12.
McMillan Shakespeare Limited (ASX: MMS) has been in a trading range of $11.50 – $13.00 after a partial recovery from the dizzying share price drop from about $18 to $8. This followed the previous Labor government's shock announcement concerning fringe benefit tax calculation changes.
The proposed legislation never saw the light of day with the Coalition Federal election victory, but its effects still linger. In a November announcement, the company showed the number of average novated-lease orders per working day was almost back to where it was before the Labor proposal in July, so it was keen to show the market it was "back to business as usual".
Its NPAT growth for the past two years, which reflects the business before the proposed change in fringe benefit tax calculations, was a compound 19.5% annual rate, from $43.4 million to $62.1 million. Return on equity and net profit margins were 31.8% and 18.9% respectively and its long-term debt to NPAT is a manageable 2.9 times.
Foolish takeaway
Professional services can sometimes have high-profit margins and throw off strong earnings for future growth. They can also be susceptible to market cycles and "growing too big too quickly", as in the case of Transpacific Industries, which is now undoing things to get back to a more stable base of business.
Look for financial soundness in companies and stable balance sheets that can weather weak business conditions. Those are the kinds of businesses that have funds to pick-up other companies, and still can grow revenue and earnings in hard times.
