Ashley Services Group Ltd (ASX:ASH) follow up

This is a follow up to my post from 1st Feb when Ashley Services announced a three cent dividend for the first half of FY22. The original note was rushed out during a dopamine saturated state caused by the 20% rise in the market price of my holding that day. Since then I have had a niggling feeling that I underplayed the short-term covid induced nature of Ashley Services current performance.

Although I consider MD Ross Shrimpton to be an astute operator and capital allocator, this is not a particularly high quality business. There is some steady growth augmented by the occasional acquisition but not enough to compensate for the likely drop off in earnings following the reopening of borders and return of immigration. 

As a labour hire company (with a small training division) Ashley Services is a cyclical business and in particular its margins fluctuate according to tightness in the labour market. We are seeing the labour hire division earning abnormally high EBITDA margins right now of more than 5% whereas prior to covid it typically earned margins of between 3.5% and 4%.

The training division earns much higher margins but represents only a couple of percent of group revenues and its EBITDA contribution is only a small percentage of corporate costs. Therefore, group margins are likely to continue to be dictated by the labour hire division going forward.

Between FY18 and the H120 (the period following the VET FEE-HELP scandal and prior to the pandemic) group EBITDA margins inched up from 2.4% to 3.3% and so I consider 3% to be a fair estimate of normalised group EBITDA margins. 

Based on this assumption, I estimate the normalised EBITDA run rate of the business is $11.5 million (using FY21 revenue) and that the stock is trading on EV/EBITDA of around 9 at today's close or a PE ratio of 17. This does not represent particularly good value given the quality of this business. 

Clearly, this is a conservative (perhaps overly so?) valuation and so I have not definitively decided to sell my shares. However, I think there's a reasonably good chance that the stock continues to rally post the release of the half year results (which should be good) and into the ex div date and if so I might be tempted to make the most of the opportunity.