People Infrastructure Ltd’s (ASX:PPE) $2.8 million acquisition of a 50% stake in Recon Solutions and Recon Technology is expected to boost the company’s underlying earnings by $0.8 million over the next 12 months.
Recon Solutions provides contractors and permanent personnel to the information and communications technology industry (ICT).
The acquisition should assist People Infrastructure in generating income from the ICT sector where it currently has little exposure.
New industry exposure for a new entrant
People Infrastructure has been listed on the ASX for less than two months.
The company has traded strongly since its initial public offering which was priced at $1.00 per share, and has always traded at a premium.
The group generates a significant proportion of its revenue from the community care sector and industries such as childcare, infrastructure, mining and hospitality.
Recon recognised for its growth in recent years
Recon was recognised as the twelfth fastest growing company by BRW in 2016, and in 2017 the group was awarded growth company of the year at the annual Recruitment International Awards.
By comparison, some of People Infrastructure’s sources of income are best known for different attributes.
Their traditional industry exposure normally features a lack of cyclical volatility and the generation of reliable recurring income, attractive for conservative investors looking for earnings predictability.
Recon should provide a level of growth not easy to find in more mature industries, suggesting that it could result in a healthy balance
Consideration implies underlying earnings multiple of 3.5
The acquisition price consists of an upfront payment of $2.3 million in cash and $0.5 million in People Infrastructure shares.
There will also be an opportunity for the vendors to receive a further 1,498,128 million shares in People Infrastructure based on Recon achieving underlying earnings of $4 million in either fiscal 2019 or fiscal 2020.
Based on its 50% stake, the company is forecasting Recon to contribute $0.8 million in underlying earnings for the next 12 months, indicating that the acquisition multiple relative to current earnings is 3.5 without taking into account performance-based payments.