COMPANY DATA

Date of Report	ASX	Price	Price Target	Analyst Recommendation
12/12/18	GO2	$0.092	N/A	N/A

Date of Report 12/12/18	ASX GO2
Price $0.092	Price Target N/A
Analyst Recommendation N/A

Sector: Technology	52-Week Range: $0.085 – $0.20
Industry: Technology Services	Market Cap: $4.9 million

Source: Bloomberg

KEY POINTS

• RAPIDLY BUILDING SCALE: The company’s stated objective is to triple the size of the company within three years of its listing, pointing to a revenue target of around of $100 million in FY 2021. Target CAGR of about 30% will be driven by a multi-pronged, organic growth strategy and strong underlying market fundamentals.
• SUSTAINABLE AND RISING PROFITABILITY: With FY 2018 revenue of $45 million and breakeven EBITDA in the June half year, a maiden positive EBITDA is expected to be achieved in FY 2019, with a net profit to follow in FY 2020. Having achieved critical mass, margins are rising and will continue to do so for the next few years.
• GROWTH ON TRACK: The company reported September quarter 2018 revenue growth of 50% over the same quarter in 2017 with 30% growth from the recruitment business.
• DIVERSIFIED BUSINESS MIX: The GO2 People is broadening its business mix from recruitment and labour hire to include building services and training. Business services and training achieve higher gross margins and there are considerable operating synergies between these businesses.
• AGGRESSIVE GROWTH PROFILE: GO2 has achieved enormous growth since its establishment in 2011, including 29% revenue growth in FY 2018, Ongoing high rates of growth will be driven by expansion of the recruitment and labour hire business in NSW and Victoria, where offices have recently been established, continuing success of the building services business focussed on remote and regional WA, and integration of the proposed acquisition of GO2 Skills and Training. These strategies are underpinned by a nationwide boom in infrastructure spending and increased mining activity.
• QUALITY CLIENTS AND PROJECTS: GO2 clients are mostly Tier 1 and Tier 2 level businesses. Whilst there may be some competition on margins, competitive advantage is achieved primarily through the depth and quality of the business relationship and the quality and reliability of the labour supplied.
• LIMITED THREAT FROM LIKELY INCREASED REGULATION: In the market segments in which the labour hire business operates, rates are typically set on a cost-plus basis with pay rates universally set with reference to relevant awards and enterprise agreements. Increasing regulation of the labour hire industry is likely to work in the company’s favour by raising the barriers to market entry, tightening compliance, and by generally raising pay rates in a highly fragmented industry dominated by small operators.
• PRESSURE ON WORKING CAPITAL IS DECLINING: Working capital funding is the primary barrier to growth and scale in the labour hire industry. The late 2017 IPO and ASX listing of GO2 provided the funding for the company to pursue its current growth strategies and seek long term sustainability. A breakthrough to sustainable profitability and a diversity of income sources, will reduce pressure on working capital and overall funding requirements.
• FUNDING COSTS EXPECTED TO FALL: Debt funding is currently through a relatively expensive debt factoring facility. Over the next two years, once sustainable profitability is demonstrated, low cost bank funding is expected to become available.
• HIGHLY EXPERIENCED MANAGEMENT: Where labour is effectively a commodity, competitive advantage is based on a strong, deep rooted, values based, client-oriented culture driven from the top by a tightly knit group of managers with enormous labour hire and building industry experience.

RISKS AND CHALLENGES

The GO2 People has enjoyed rapid growth since its establishment about 7 years ago with the benefit of a compelling value proposition, strong management and favourable market conditions. The company’s objective of achieving revenue of around $100 million within three years of its ASX listing requires an impressive growth rate which becomes increasingly difficult to sustain as scale builds and market share rises. Nevertheless, the growth strategies being implemented to achieve this objective are sound and multi-pronged. However, GO2 does face a number of risks which could impede the achievement of its growth objectives. We believe that the key risks are: Working capital funding: As labour is typically paid on a weekly basis but client payments are somewhat stretched out, there is a working capital gap which needs to be funded. The pressure on working capital is exacerbated by the inherent low margins in labour hire. Accordingly, working capital funding is a major constraint on growth and has been a barrier for smaller companies seeking to build their businesses. GO2 climbed this barrier with its 2017 IPO. However, due to the distractions associated with preparing the IPO, management attention was diverted away from working capital management and receivables, in particular, blew out in FY 2018 resulting in a $4.1 million operating cash flow deficit. Cash balances at the end of June 2018 amounted to $2.6 million which will be tight in the absence of stronger working capital management. We understand that receivables management has considerably tightened and with gross margins strengthening, as the higher margin construction business contributes a greater share of revenue, we are forecasting reduced cash burn in FY 2019 with positive net operating cash flow in FY 2020. This will alleviate pressure on capital and debt. As margins strengthen thereafter, cash reserves are expected to build. Tighter industry regulation: Regulation of the labour hire industry has increased in recent years at the state level where licensing is now in place in most states (NSW is the principle exception). At this point, regulation is largely based on a licencing regime but is likely to be extended in the future. Labour hire is a major issue for the unions and should the Labor Party win the next Federal Election due in 2019, the industry can expect to face increased regulation at the Commonwealth level. The recently decided WorkPac Pty Limited v Skene by the Federal Court raises questions regarding the definition of a casual employee and by extension entitlement to a range of benefits including paid leave, notice of termination, redundancy pay, public holidays and, potentially, access to unfair dismissal laws, which we would expect a Labor government to seek to address. Although we can only speculate on what impacts there might be, we assume that a Labor government will seek to raise industry operating standards and industry awards as well as increasing regulatory oversight and compliance costs. Barriers to market entry and compliance costs will inevitably rise but we doubt that there will be any serious threat to the overall business model and we don’t believe that the better managed labour hire businesses will be greatly affected. The most vulnerable to these threats will be the host of small businesses typically found in the cleaning and some parts of the building industry. GO2’s clients, who are almost universally Tier 1 and Tier 2 businesses, already dictate minimum payment rates and this won’t change. GO2 already has a program enabling casuals to transfer to permanent part time with a host employer but there is no evidence of widespread interest in changing as casual loadings would disappear and gross income would be reduced, notwithstanding access to sick and annual leave. Despite the issues and nominal threats, the labour hire business is too entrenched in too many industries to be unwound. At worst, increased regulation will strengthen the position of the better managed businesses and reduce the threat of competition especially from small businesses who lack to resources to manage changes. Labor shortages: The ability to source and maintain quality, reliable labour is a core capability of any labour hire business. However, labour is typically sourced on a non-exclusive basis and, more often than not, people register with multiple labour hire businesses. Accordingly, the ability to provide work on quality projects and being able to establish a solid reputation is also critical. These have underpinned GO2’s success. However, in an environment where there is a high level of construction activity, demand for labour will be high, including potentially from contractors who may offer full-time employment, and the ability to attract labour and maintain its workforce could be compromised. GO2’s building services business may mitigate some of this risk by being able to ensure continuity of work for valued workers where otherwise there would be gaps between job placements. Sustainability of the infrastructure boom: Infrastructure spending is rising sharply around Australia and will escalate over the next few years as various key projects build momentum and new projects enter the pipeline. A large number of rail and road projects are already in the pipeline down the eastern seaboard and in WA and more are expected to be added. Whilst the outlook remains very positive, the boom could come to an abrupt halt should there be another financial crisis. The winding down of the apartment construction boom is freeing up resources for elsewhere and greatly improved budgetary positions in most states and the commonwealth would indicate that infrastructure funding will be readily secured. However, absolute debt levels will become a constraint at some point whilst funding could become problematic when interest rates rise and if another financial crisis emerges. Management depth: GO2’s key differentiator primarily lies in how it manages it relationship with clients (solution oriented rather than transactional) and its labour force and is best described as cultural. This is much easier to sustain when management is largely in the hands of the founders. However, as the company grows and, in particular, expands geographically, it becomes much harder to maintain consistency. The management team is relatively small and has already expanded to accommodate expected growth over the next few years. New staff have been heavily trained in the company’s approach and engaged in strategic development. However, a risk remains that replacements required for any unplanned departures could impact the implementation of strategies and overall management.

RISKS AND CHALLENGES

The GO2 People has enjoyed rapid growth since its establishment about 7 years ago with the benefit of a compelling value proposition, strong management and favourable market conditions. The company’s objective of achieving revenue of around $100 million within three years of its ASX listing requires an impressive growth rate which becomes increasingly difficult to sustain as scale builds and market share rises. Nevertheless, the growth strategies being implemented to achieve this objective are sound and multi-pronged. However, GO2 does face a number of risks which could impede the achievement of its growth objectives. We believe that the key risks are: Working capital funding: As labour is typically paid on a weekly basis but client payments are somewhat stretched out, there is a working capital gap which needs to be funded. The pressure on working capital is exacerbated by the inherent low margins in labour hire. Accordingly, working capital funding is a major constraint on growth and has been a barrier for smaller companies seeking to build their businesses. GO2 climbed this barrier with its 2017 IPO. However, due to the distractions associated with preparing the IPO, management attention was diverted away from working capital management and receivables, in particular, blew out in FY 2018 resulting in a $4.1 million operating cash flow deficit. Cash balances at the end of June 2018 amounted to $2.6 million which will be tight in the absence of stronger working capital management. We understand that receivables management has considerably tightened and with gross margins strengthening, as the higher margin construction business contributes a greater share of revenue, we are forecasting reduced cash burn in FY 2019 with positive net operating cash flow in FY 2020. This will alleviate pressure on capital and debt. As margins strengthen thereafter, cash reserves are expected to build. Tighter industry regulation: Regulation of the labour hire industry has increased in recent years at the state level where licensing is now in place in most states (NSW is the principle exception). At this point, regulation is largely based on a licencing regime but is likely to be extended in the future. Labour hire is a major issue for the unions and should the Labor Party win the next Federal Election due in 2019, the industry can expect to face increased regulation at the Commonwealth level. The recently decided WorkPac Pty Limited v Skene by the Federal Court raises questions regarding the definition of a casual employee and by extension entitlement to a range of benefits including paid leave, notice of termination, redundancy pay, public holidays and, potentially, access to unfair dismissal laws, which we would expect a Labor government to seek to address. Although we can only speculate on what impacts there might be, we assume that a Labor government will seek to raise industry operating standards and industry awards as well as increasing regulatory oversight and compliance costs. Barriers to market entry and compliance costs will inevitably rise but we doubt that there will be any serious threat to the overall business model and we don’t believe that the better managed labour hire businesses will be greatly affected. The most vulnerable to these threats will be the host of small businesses typically found in the cleaning and some parts of the building industry. GO2’s clients, who are almost universally Tier 1 and Tier 2 businesses, already dictate minimum payment rates and this won’t change. GO2 already has a program enabling casuals to transfer to permanent part time with a host employer but there is no evidence of widespread interest in changing as casual loadings would disappear and gross income would be reduced, notwithstanding access to sick and annual leave. Despite the issues and nominal threats, the labour hire business is too entrenched in too many industries to be unwound. At worst, increased regulation will strengthen the position of the better managed businesses and reduce the threat of competition especially from small businesses who lack to resources to manage changes. Labor shortages: The ability to source and maintain quality, reliable labour is a core capability of any labour hire business. However, labour is typically sourced on a non-exclusive basis and, more often than not, people register with multiple labour hire businesses. Accordingly, the ability to provide work on quality projects and being able to establish a solid reputation is also critical. These have underpinned GO2’s success. However, in an environment where there is a high level of construction activity, demand for labour will be high, including potentially from contractors who may offer full-time employment, and the ability to attract labour and maintain its workforce could be compromised. GO2’s building services business may mitigate some of this risk by being able to ensure continuity of work for valued workers where otherwise there would be gaps between job placements. Sustainability of the infrastructure boom: Infrastructure spending is rising sharply around Australia and will escalate over the next few years as various key projects build momentum and new projects enter the pipeline. A large number of rail and road projects are already in the pipeline down the eastern seaboard and in WA and more are expected to be added. Whilst the outlook remains very positive, the boom could come to an abrupt halt should there be another financial crisis. The winding down of the apartment construction boom is freeing up resources for elsewhere and greatly improved budgetary positions in most states and the commonwealth would indicate that infrastructure funding will be readily secured. However, absolute debt levels will become a constraint at some point whilst funding could become problematic when interest rates rise and if another financial crisis emerges. Management depth: GO2’s key differentiator primarily lies in how it manages it relationship with clients (solution oriented rather than transactional) and its labour force and is best described as cultural. This is much easier to sustain when management is largely in the hands of the founders. However, as the company grows and, in particular, expands geographically, it becomes much harder to maintain consistency. The management team is relatively small and has already expanded to accommodate expected growth over the next few years. New staff have been heavily trained in the company’s approach and engaged in strategic development. However, a risk remains that replacements required for any unplanned departures could impact the implementation of strategies and overall management.

BUSINESS OVERVIEW

GO2 Recruitment, the forerunner to The Go2 People, was established by Billy Ferreira and Paul Goldfinch in Perth in 2011 to supply temporary labour to the building and mining industries in WA. Its first office in Queensland was opened 2012. After a number of years of strong growth, increasing working capital pressures caused growth to stall and threatened further expansion. Accordingly, the company was restructured and completed an IPO in late 2017 raising $10 million to fund the next phase of its development, which is to triple the size of the group over the next three years. The GO2 People comprises two business units; Labour Hire and Building Services. A third business, Training, will be added later in 2018 once the proposed acquisition of GO2 Skills & Training is completed. Building Services is a relatively new business unit which is providing a useful diversification of income as well as much stronger margins. Geographic and business diversification are core elements of the company’s growth strategy and the following charts show the impact that has already been achieved. The first chart below, from data in the 2018 Annual Report, highlights the change in composition of group revenue and operating profit over the past two years. Although Building Services share of revenue is still relatively low, it is already the largest source of operating profit.

Source: Gordon Capital The following chart, from the company’s 2018 annual report, shows the change in revenue mix on a geographic basis. The combined share of revenue from WA and Qld (labour hire) declined from over 90% in FY 2017 to about 70% in FY 2018 as growth in the building services business and the new labour hire branch in NSW started to have an impact. In FY 2019, the share of total revenue sourced from the WA and Qld labour hire branches will fall to nearer 50% as the other parts of the business continue to build momentum and with contributions from the new Victorian branch.

Source: The GO2 People 2018 Annual Report The Labour Hire business places predominantly blue-collar trades and labour to the construction, mining and logistics industries on temporary placement. Placements may be from 1 day through several weeks and sometimes months. In being able to also place technical and professional staff in these industries, the company can provide total workforce solutions. GO2 does not supply and manage total operating workforces on long term contracts but rather provides “top-up” labour to support existing workforces with additional capacity to manage variable project requirements.

The business will employ about 2,000 people throughout FY 2019 of whom about 400 to 500 will typically be on placement at any one time. Labour is sourced through the company’s website, job advertising platforms, word-of-mouth and social media, in particular industry-oriented Facebook pages. Revenue is generated on a cost-plus basis driven by the number of labour hours incurred and gross margins are generally around 10%. There is limited capacity to manage this margin as all the key cost items are fixed. However, workers compensation premiums do offer some modest scope. With further improvement in the workforce injury rate in WA and Queensland, insurance premiums will continue to fall, however in new markets including NSW and Victoria, premiums will be at the high end of the typical range, around 5% of payroll, giving some scope for reductions as a good record is developed over the next couple of years. GO2’s clients are mostly Tier 1 and Tier 2 businesses of whom about 20 in WA and Queensland are long term relationships. Typically, GO2 will be on a small panel of preferred labour suppliers with contractors and will supply labour to these contractors or sub-contractors to support various components of a construction or mining project. An important strategic opportunity is to extend these and other relationships into the newer markets. The Building Services business is primarily focussed on remote and regional locations in WA. This business unit provides an outsourced project management option for clients who don’t wish to self-manage (typically building) aspects of their projects. Using rapid building methodologies, such as pre-fabrication, it constructs affordable, retirement living and indigenous housing and mining camps as well as other non-process mining infrastructure and buildings. Key structural elements are pre-fabricated off-site into sub-assemblies by Perth based manufacturers and wet areas, such as bathrooms, are manufactured by GO2, with final assembly on site. The business maintains its own core staff but draws on the labour hire business, as required. In addition to its remote area and rapid building expertise, the company is building competitive advantage by developing design and funding solutions for difficult market segments such as public and indigenous housing. Projects have been secured from existing labour hire clients whilst other relationships have been established with indigenous groups to research and develop appropriate housing options for indigenous communities and similar studies are underway with regard to public housing. Two large projects currently underway are:

• Stage 1 of the Meadowbrooke Lifestyle Estate, near Bunbury, WA. Project value $18 million.
• Construction of up to 33 build homes on Dirk Hartog Island. Project value between $12.5 million and $16.5 million.

As work is project based, growth may be lumpy depending on the timing of projects. The company indicated in its September quarter 2018 update that it has a number of government and mining project tenders in progress and is awaiting the award of a contract from a client. The number of contracts secured and their timing will have a material impact on revenue and profits. On 8 October 2018, The GO2 People announced it had issued a Term Sheet to acquire GO2 Skills and Training which will form the third leg of the company’s business mix. Training is a natural adjunct to the recruitment and labour hire business and is an important value add in upskilling workforces. GO2 Skills and Training is building revenue momentum although we believe annual turnover is still less than $1 million. Nevertheless, we understand that it has already been a valuable lead generator for the recruitment and labour hire business.

LABOUR HIRE INDUSTRY OVERVIEW

In August 2016, a Victorian Parliamentary Inquiry into the Labour Hire Industry and Insecure Work presented its final report. Whilst, the report dealt primarily with Victoria, its analysis and observations are generally applicable to Australia, overall. The Inquiry found that nationwide there were deficiencies and inconsistencies in available data but nonetheless concluded that the labour hire industry had over the past 20 to 30 years become a significant employer, particularly in administration and support services, mining and manufacturing. Moreover, that there were very legitimate business reasons for the use of labour hire, particularly with regard to flexibility in managing peaks and troughs in business activity. The inquiry quoted the following from a Workplace Commission decision which provided a good definition of labour hire as well as raising some of the issues that the industry faces. “The business model of labour hire companies is generally that they employ persons (usually on a casual basis),and place those persons in the businesses of other companies with which the labour hire agency has a contractual relationship (host employers). In some cases the labour hire employees will work intermittently or for specific periods of time at the premises of the host employer – for example to replace the employee of a host employer temporarily absent from the workplace for a specified period, which is ascertained in advance of the placement or which may be extended or terminated during the period of the placement if circumstances change. The labour hire employee may have been required by the host employer to meet a seasonal or operational fluctuation. In other cases, labour hire employees may be required to work at the host employer’s premises for lengthy periods; under the supervision and management of the host employer; integrating with the employees of the host employer; and for all intents and purposes forming part of the host employer’s workforce. The diversity of such arrangements is considerable, reflecting the need for flexibility in modern workplaces. However, these arrangements can be a minefield for all concerned, both in practical terms and in terms of rights and obligations arising under legislation, industrial instruments and contracts of employment. The actions of a host employer – particularly when its managers and supervisors engage in disciplinary action against labour hire employees – can have a direct and fundamental impact on the rights and obligations, as between the labour hire agency and its employees.” In a 2014 analysis, The Australian Bureau of Statistics estimated that about 126,000 people were employed by agencies, representing 1.1% of the workforce. This has probably increased to nearer 200,000 people. The inquiry summarised the benefits to industry as:

• business can obtain specialist expertise it does not otherwise have;
• business can address skills shortages in particular areas;
• assisting business meet the labour demands of short term projects;
• providing the capacity for business to address fluctuating workloads and changing labour needs;
• allowing business to source ready labour quickly;
• reducing the administrative burden of employment for business;
• allowing business to supplement and improve its internal HR and safety systems through the expertise of labour hire operators; and
• uderallowing business to observe workers for a period prior to determining whether to hire the worker permanently.

Essentially, the employment risk is shifted from the host or client to the labour hire firm which may be very attractive for managing limited life projects, short term demand fluctuations and where demand for labour is strong and there are problems in securing and maintaining labour. The labour hire industry generates over $20 billion, nationally, in annual revenue. However due to low barriers to entry, the industry is highly fragmented with low market concentration. According to the IBIS World report into the Temporary Staff Industry in 2016, there are over 6,000 enterprises with the top four operators accounting for less than 22% of the market. According to IBIS World, industry revenue grew by 13.7% between 2007 and 2015, however, wages paid increased by 25.5% over the same period pointing to a marked contraction in margins. Over this period, the number of firms grew from 4,416 to 6,332. Not only have margins contracted but revenue per business fell significantly. Clearly this is a price sensitive industry, with a major contributor being the considerable working capital demands due to the requirement to pay labour, usually weekly, with deferred receipt from clients. Accordingly, working capital constraints are a major barrier to growth. We understand that the leading operators in Australia are Programmed, Chandler Macleod, Hays, and WorkPac. With the exception of WorkPac, these companies are foreign owned. Notwithstanding, or more likely because, of the sustained growth of the industry, pressures are building for greater legislative control over the industry. Unions, in particular, rail against the industry due to a range of perceived deficiencies. They perceive a threat to their membership, wage levels and employee benefits and fear increased casualisation of the workforce. Whilst some of their concerns have merit, others are overstated and ignore support in the workforce for flexible work offered by labour hire company’s. Nonetheless, legislative control of the industry is increasing most evidently with required registration and licencing in most states (NSW currently being the main exception). A future Labor Commonwealth government would almost certainly introduce greater legislative control over the industry. The Workplace Commission may very well provide a pathway for Commonwealth legislation. A recent decision in WorkPac Pty Limited v Skene by the Federal Court raises questions regarding the definition of a casual employee and by extension entitlement to a range of benefits including paid leave, notice of termination, redundancy pay, public holidays. The implication of this case is that casual employees are entitled to these entitlements. It has been argued that if applied generally the cost to business in paying past entitlements will reach several billion dollars. However, the 25% premium paid to casuals is meant to cover these entitlements and therefore paying entitlements, it is argued, would amount to double dipping. It has been reported in the AFR, that WorkPac will seek to test this proposition in the Federal Court. Clearly there are future risks to the industry from greater legislative control, however, we believe that the larger businesses with strong capital bases and management will be reasonably well placed to manage these threats and likely higher costs. We believe that smaller businesses face the greatest threat and are more likely to be targeted by a Labor government as they are perceived to be less compliant with a range of existing corporate and industrial laws and more prone to operate in shadowy areas of the economy. Scale provides considerable advantages in terms of building and maintaining a well-qualified and reliable labour pool, securing supplier status with the leading contractors and employers, less competition, better margins and better capacity to manage legal compliance. Accordingly, the opportunity for The GO2 People is to establish its position as a national supplier of middle-ranking scale with an aspiration to become one of the largest labour hire groups in the country. Notwithstanding the threat of tighter legislative control over the industry and potentially higher operating costs, the industry drivers remain unchanged and the share of the workforce attributable to the industry is likely to continue to grow, especially with growing mining activity and booming spending on urban infrastructure projects.

COMPARABLES

Labour recruitment and labour hire companies seeking to fund their growth have frequently listed on the ASX. Two of the largest companies in the industry, Programmed and Chandler and Macleod were both listed before being acquired by Japanese interests. We have identified five labour companies currently listed on the ASX which provides some guide to valuation. The five companies have range of strategies and operate in a wide variety of market sectors. Acquisitions feature prominently as a growth strategy with mixed results. The table below summarises the key metrics of these companies and shows a wide range in revenue, profitability, margins and valuation. A feature of the industry is its low margins and high working capital requirements. It does seem that labour hire companies have had superior financial performance compared with recruitment businesses, at least in recent times. Although not the largest company in terms of revenue, People Infrastructure has the highest margins and its profitability is reflected in its valuation multiple. By comparison, Programmed was priced on an enterprise multiple of 14.4 times when it was acquired in 2017 for $778 million. It should be noted that Staffing (or Labour Hire) contributed 51% of its revenue and only 38% of EBIT. Accordingly, a premium value would appear to be attributable to a diversified revenue base and above average industry margins that may be achieved as a result.

Ambition Group: Ambition is a boutique recruitment business specialising in the banking, finance, commercial and technology sectors. The company has expanded its presence from Australia to Asia and London. Its financial results have been highly variable with no consistent trend in revenue, which has been between $82 million and $115 million over the past five years. Revenue fell 11% in 2017 and EBITDA fell for the second consecutive year. Ashley Services: Ashely Services is broadly based labour hire, recruitment and training group and is focussed on industrial and engineering sectors. Revenue has grown by about 19% over the past two years to $333 million after an 8% fall in FY 2016. Profitability has rebounded strongly after a loss in that year. EBITDA rose by 66% to $8.1 million in FY 2018. Clarius Group: Clarius provides a range of permanent and contingent recruitment and payroll services, on demand human resource solutions and outsourced recruitment and human resource consulting services in Australia, New Zealand and China. Revenue has declined by 23% over the past 2 years and the company has not made a profit since FY 2010. People Infrastructure: People Infrastructure listed on the ASX in late 2017. Over 80% of the company’s revenue, which has nearly doubled over the past three years, is generated in Queensland and NSW. It has a very diversified industry exposure with Healthcare contributing about one-third or revenue with infrastructure, construction, maintenance and mining contributing another third of revenue. Approximately 3,500 workers are placed on a typical day.

FINANCIAL STRUCTURE

The labour hire industry is characterised by low gross margins and high levels of working capital. Whilst, specialised, tightly managed labour hire businesses can be quite profitable at a relatively small size, as was The GO2 People in its early years, expansion is difficult without a strong capital base. Activity growth requires considerable working capital and regional and business diversification adds to the overhead burden. Soon after its establishment in 2011 in Perth, GO2 set-up a branch in Queensland and growth over the next three years was very strong. Growth stalled in FY 2017 due to working capital pressures and as the company moved to an ASX listing. Following the listing in late 2017, growth again accelerated. With a rebound in gross margin, the operating loss in FY 2018 was reduced. This loss was entirely in the December half year with the company achieving breakeven in the June half. The FY 2018 result included the partial reversal of an impairment provision against a loan to GO2 Skills and Training of $248K. The company has established two divisions, labour hire and building services, to better balance gross margins and overheads and achieve operating synergies. The impact will be increasing gross margins as the Building Services business grows.

The company has about 40 staff in Perth and its regional offices, and is already structured to support a much larger revenue base in line with its strategic plan. Accordingly, tight management of overheads will enable operating profit to rise sharply over the next few years as sustainable profitability is achieved.

The company’s balance sheet is dominated by receivables which account for 72% of total assets. Notwithstanding, the growth in revenue in FY 2018, receivables blew out in the year ended 30 June 2018 primarily due to the distraction of management through the IPO process. Days receivables jumped from 88 in the prior year to an unsustainable 101. In comparison days payables increased from 38 to 43 over the same period. As capex is inconsequential, plant and equipment represents a relatively modest share of total assets. There is no goodwill or other intangibles on the balance sheet. As evidenced in the adjacent table, receivables were financed before the IPO with a combination of payables and debt. The IPO provided appropriate capitalisation, enabling the balance sheet to expand. However, debt funding is still expensive being a receivables factoring facility with an annual funding rate of 7.5%. It is anticipated that with the next two years, once the company achieves sustainable profitability that lower cost bank funding will become accessible. With modest capex, the company’s cash position and requirement are largely driven by its operations. Net cash flow from operations has been negative in each of the past two years as new working capital expanded in the face of strong revenue growth.

With a cash balance of $2.6 million as at 30 June 2018, funding is potentially tight if the company is to achieve around 30% revenue growth in FY 2019. However, if days receivables can be reduced to around 90 and margins increase as anticipated, the company should be able to achieve a modest net operating cash flow surplus in FY 2019. If revenue and margins continue to expand as the company expects, cash flow should grow strongly over the next few years, removing any need for a capital raising, in the absence of an acquisition.

The proposed acquisition of GO2 Skills & Training will have no cash flow impact and only a limited impact on the balance sheet. The headline cost of $465K will be offset against loans to the business. As all but $90K of these loans have been previously written-off, we assume that there will be a write-back in the income statement and some goodwill on the balance sheet.

DIRECTORS & SENIOR MANAGEMENT

Darren Cooper, Non-Executive Chairman Darren has spent in excess of 20 years with various companies in management and senior executive roles, and now holds a number of Board and Strategic Advisory roles across a range of industries including property, professional services and telecommunications. He is also an investor in and director of a range of technology and media-based start-up businesses. Abilio “Billy” Ferreira, Managing Director Billy is a proven senior manager and entrepreneur with a strategic, disciplined and practical approach. After completing 5 years in the Australian Military in 2000 and undertaking a leadership role in the UK with London’s exclusive health club, Next Generation, Billy gained valuable experience in construction as the General Manager of a residential building business in 2005-6 in Adelaide, South Australia. From here, Billy became a part of the senior management group of the then privately owned, Australian Portable Buildings (APB), in Sydney, New South Wales. After a venture capital acquisition in 2007, Billy relocated to Perth, Western Australia and become an integral part of growing the business into a new territory where he was exposed, as a client, to the Labour Hire industry. Billy co-founded GO2 Recruitment in 2011 with Paul Goldfinch. Peter McMorrow, Non-Executive Director Peter has over 30 years’ project and executive experience and is a respected leader in the infrastructure and resources industries. His experience covers all disciplines of engineering and he has worked on a wide variety of large and complex infrastructure projects both in Australia and abroad. His extensive knowledge extends to all facets of engineering, project identification, winning and delivery as well as management of dynamic, profitable and long-lasting business operations. He was appointed Managing Director of Leighton Contractors Pty Limited (LCPL) in 2004, and under his leadership the Company experienced enormous growth and success, increasing revenue to over $5 billion and diversifying into areas including mining, industrial, telecommunications, investment, and services activities. Prior to this he held top level executive roles at Leighton in Asia, Australia and New Zealand, and served as General Manager at Baulderstone Hornibrook. He is currently the Chairman of SRG Limited, a provider of specialised services to the infrastructure and mining sectors. Andries “Dickie” Dique, Independent Non-Executive Director Dickie has 25 years’ experience in senior executive and management roles in construction businesses and is a respected leader in the Western Australian construction industry. A registered builder in a number of states in Australia, his experience covers the commercial, civil, residential, mining and modular sectors. His most recent operational role was as a Director at Pindan Contracting prior which he was General Manager and then Chief Operating Officer at Decmil Group Limited (ASX:DCG). Paul Goldfinch, Head of Investor Relations & Growth & Co-founder Paul is a proven senior manager and entrepreneur with a practical background in the labour hire and construction industries. A trade qualified carpenter, Paul progressed his career in the construction and labour hire sectors in the UK before taking up a senior management role in a national recruitment business in Australia. He jointly founded The GO2 People with Billy Ferreira. Christopher Streat, Head of Building Chris is a construction professional with diverse experience over 15 years across the residential housing and remote modular building sectors. A passion for alternative building methods coupled with a high level of technical expertise, has seen Chris manage many large scale projects. Ross Lovell, Head of Labour Hire Ross has both national and international management experience spanning 17 years and has built a vast network in both the private and public sectors. Working in all facets of the maintenance and construction fields, Ross has led large companies as a General Manager driving growth and high performance. Matthew Thomson, Chief Financial Officer & Joint Company Secretary Matt is a Chartered Accountant. Having begun his career at Coopers & Lybrand (now PWC) he has over 15 years’ experience in senior Financial & Management Accounting Roles.

SHAREHOLDERS

The shareholder base is dominated by the company’s two founders, Billy Ferriera and Paul Goldfinch, who own a combined 46.6% of the issued capital. In total, substantial shareholders control 54% of the capital and the top 20 control 73.1%. The founders holdings, 64.5 million shares in total, are voluntarily held in escrow for 2 years which will expire in late October 2019.

Given the company’s capitalisation of around $10 million (including shares in escrow), The GO2 People shareholder mix is predominantly comprised of retail and high net worth investors. However, as indicated by nominee accounts, it appears that there are a small number of professional fund managers on the register. In the absence of a major capital raising, or a sell down by the major shareholders (which is not anticipated), which would create opportunities for fund managers to invest in the stock, the shareholder mix is likely to remain predominantly retail and high net worth.

RECENT EVENTS AND MARKET ANNOUNCEMENTS

Please note that Gordon Capital has been retained by The GO2 People Limited to provide this report for a fixed fee. Gordon Capital does not provide specific investment recommendations and does not receive any additional benefit for the provision of this report. Gordon Capital aims to provide a balanced and objective analysis in this report. At the time of writing the report we do not hold shares in The GO2 People Limited. They do not receive any indirect benefits or assistance from The GO2 People Limited. Their remuneration is not linked to the views expressed in this report. At the time of writing the report they do not hold shares in The GO2 People Limited