Work Service rebounds on subsidiary sale

Here is the translation of the article into English, maintaining all facts and figures as requested:

The listed company is close to selling Exact Systems for over 300 million PLN. This will allow it to get rid of debts, liquidity problems and… continue growing at a double-digit pace.

4.66 PLN per share — to such a level Work Service’s (WS) share price fell on Friday. It has never been this low in history. The company is valued at slightly over 300 million PLN. Meanwhile, just a year ago, the price was 11.5 PLN. A downward trend has been clearly visible since May, significantly accelerating in the summer when a series of announcements appeared that unsettled investors. Work Service, dealing among other things with temporary work and outsourcing, announced that it had postponed the payment date for the acquisition of the Hungarian company Prohuman. Although the official statement only mentioned an agreement to defer payment, the market had no doubts — the listed group has no money.

The suspicion was justified insofar as a few months earlier it announced that its companies had applied to tax offices and the Social Insurance Institution (ZUS) for a deferral of tax and contribution payments. In addition, it failed to introduce a group company — Exact Systems, dealing with quality control solutions for the automotive industry — to the Warsaw Stock Exchange (GPW). On the investor forum Bankier.pl, in the thread concerning Work Service, the term "bankrupt" appeared increasingly often. The drop in the price to a historical minimum was generally accompanied by low turnover, which best reflects the mood around the company.

"Large investors understand the situation, but tension is clearly visible among small stock market players, which led to sales at an irrationally low price. By law, we could not inform about the ongoing processes that will improve the company's condition, while several announcements appeared that could have caused anxiety," admits Maciej Witucki, President of the Work Service group.

"Meanwhile, it must be said clearly — the company is developing very well: the business is growing at a double-digit pace this year, both in terms of revenue and EBITDA profit, we are entering new markets and have new growth engines. This makes Work Service, at today’s price, a bargain," says Tomasz Misiak, head of the supervisory board, founder, and significant shareholder of the company.

Many indications suggest that this "promotion" will not last long. Yesterday after the session, Work Service announced that it is in the process of selling Exact Systems. Blackwood Capital, an advisory firm founded in New York with offices in London, Barcelona, and Frankfurt, which has experience in transactions in this sector, is helping to find a buyer.

"We see considerable interest in the company from over 20 investors, so we expect the valuation to have a double-digit EBITDA multiplier. Based on current ones, we estimate that the process will close in 6-9 months," says Maciej Witucki.

Regained liquidity Information published on the occasion of the recent attempted debut on the GPW shows that Exact was expected to generate approx. 35 million PLN EBITDA this year, which means that the potential value of the transaction exceeds 350 million PLN. WS owns over 70 percent of Exact Systems shares. Such a cash injection means a completely new opening for the listed company.

"All fears about the loss of liquidity, which completely overshadowed the image of the company, will be forgotten. The sale of Exact Systems will allow us to pay off debt, improve liquidity, and we will have money to close the transaction with our Hungarian partners," says Maciej Witucki.

It seems that investors believed it — at the opening of Tuesday's session, the Work Service price rose by nearly 6.5 percent.

Especially since yesterday WS also informed about an agreement with the Hungarians postponing the payment to June 2018. The listed company will have the means to repay bank loans. It has approx. 200 million PLN of them in Millennium Bank, Raiffeisen, BZ WBK, BGŻ BNP Paribas, and recently PKO BP.

"In recent months, we have had enormous pressure from banks, often unjustified and de facto damaging to the company and its reputation. The problem is solved, but after the sale, we want to arrange a new financing structure, not necessarily with the same partners," says Tomasz Misiak.

The bitter words addressed to the banks are related to the failure of the Exact Systems IPO. "One of the banks crediting us does not understand capital market mechanisms. It forbade the buyout of shareholders who took part in the pre-IPO, as a result of which they held shares with dividend preference. And this is what the funds that declared the purchase of shares in the IPO wanted. This caused the offer not to come to fruition," says Tomasz Misiak.

The labor market drives growth WS will get rid of a high-margin business. Exact was described by some analysts as the "pearl in the group" due to the level of margins and cash, but the president argues that finance is the only field where the separation will be visible.

"It will have no impact on the functioning of the group, because Exact Systems operated as a completely independent company and de facto did not have much in common with the HR business," says Maciej Witucki.

"We have had a plan to exit this investment for a long time; this was, among others, the goal of introducing it to the stock exchange — the next step was to be the sale of shares," adds Tomasz Misiak.

The head of the supervisory board argues that those who look at the fundamentals will notice the undervaluation of WS on the GPW.

"This year we will generate 90-100 million PLN EBITDA. The world leader is valued at the level of 9 times EBITDA, and I see no reason why the valuation of the leader in the region should be different, especially since we are growing at a double-digit pace," says Tomasz Misiak.

In the first half of the year, Work Service's revenues increased by 11.5 percent to 1.34 billion PLN, and EBIT reached a record 36.7 million PLN. The heads of the largest player in the region argue that the heated labor market favors them greatly, and WS predicted the impending problems with finding hands to work in time and is prepared for it.

"Of the 19,000 employees we employ in Poland, as many as 5,000 are Ukrainians. Their number is growing at an incredible pace, this is saving the Polish labor market, and for us, it means a new engine of business growth," says Tomasz Misiak.

But not only the Polish market drives WS results. In the first half of the year, organic growth in the Czech Republic amounted to 33 percent, and in Hungary nearly 20 percent. A light in the tunnel is also visible on the German market, where it has not been rosy since the acquisition.

"The president managed to rebuild relations with our German partners, which is crucial for business development," explains Tomasz Misiak.

"We are managing to implement the plan to bring the German business into the black. It is true that we have had a difficult two years behind us, when the result was around zero or below, but now we have profits and the future looks good," says Maciej Witucki.

Multiplying profits The sale of Exact Systems is the third exit from an investment for WS (previously it sold IT Kontrakt and the business in Russia). This is a 180-degree change in philosophy, because the listed company, thanks to acquisitions among other things, quickly increased its scale, entered new markets, and transformed into a regional player, accompanied by declarations from the company's creators about aiming for 1 billion in revenue, first in zlotys, then dollars, and at the end of the acquisition wave — even euros. Rapid growth was, however, paid for with a significant increase in debt, but no one in the company regrets these acquisitions.

"We earned money on all investments, with the exception of Russia (but that was not a cash investment), and significantly so," says Tomasz Misiak.

IT Kontrakt was sold for four times more than the purchase price. If binding offers for Exact confirm the initially declared amounts, WS will earn 20 times more than it spent on the purchase (taking into account the dividend already paid out). Profits are also brought by the acquired businesses in Hungary and the Czech Republic. A shadow is cast only by the divestment in Russia — on the occasion of the semi-annual report, WS made a write-off of the value of the Russian ProService Group for 156 million PLN, which resulted in a 70 million PLN net loss in the first half of the year.

"This is only an accounting loss. During the merger of two companies, the share package was valued at 90 million PLN, but in reality, we spent 30 million PLN on this company and our partners committed to returning such a sum after the transaction is finalized. So in reality, we will break even, and the loss is only on paper. The Russian market has become non-transparent; it is difficult for a company like us — which wants to comply with international standards — to function in such conditions. Besides, we are not the only ones who withdrew. Adecco, the world number one, did too," says Tomasz Misiak.

This does not mean that Work Service forgets about acquisitions permanently.

"Thanks to the sale with such a profit, we will be free of debt and will concentrate in peace on business development, but if another opportunity appears to purchase a company that will allow us to earn a lot in a few years, we will gladly use it," says Tomasz Misiak.

Maciej Witucki announces that in November the company will show the market its strategy until 2020, where specific declarations regarding potential growth-accelerating factors will likely appear.