On 2 August 2019, HRnetGroup announced that it acquired 25.02% of Staffline Group plc, making it an associate company of HRnetGroup. This article will cover the impact in the subsequent quarter after this news announcement
- Financial impact to HRnetGroup
- Business of Staffline Group plc
- Other considerations
Financial impact to HRnetGroup
Staffline Group plc becoming an associate company to HRnetGroup do have an impact in terms of balance sheet and profit and loss statement.
Recognition of investment
Based on FRS28, investment in associate will be adopting equity method of accounting, where the recognition of investment will be at cost. There was no disclosure by HRnetGroup on the total consideration for the purchase of 25.02% stake in Staffline Group, however, we can see that HRnetgroup purchased 11,671,702 shares of Staffline at a price of 180 pence for a total consideration of £21,009,064. Assuming that the 17,244,626 (25.02%) shares was purchased at 180 pence, investors will expect the following:
Decrease in cash in balance sheet by approximately SGD 46.3million .
Increase in investment in associates in balance sheet by approximately SGD 46.3million.
Please see the illustrative balance sheet below:
Profit and Loss in subsequent period
Based on FRS28 paragraph 10, the change value of investment in associates will increase or decrease depending on the profit and loss attributable to HRnetGroup shareholdings. Investors should expect to see an addition line item in the financial statement “Share of results of associates”. The calculation of the Share of results of associates shown below:
Share of results of associates = [Shareholding of Staffline by Hrnetgroup] x [Profit and loss by Staffline]
Using Staffline Q4’18 result as an example:
Pretax income of Staffline: -20,100,000
Shareholding of Staffline: 25.02%
Share of result of associates: SGD 8.40 (£5.03million)
The profit and loss statement will record a loss in “share of results of associates” and correspondingly decrease the asset value of “Investment in associate” by the same amount.
Below is an illustrative example of a profit and loss statement with Share of results of associates.
In the event Staffline announced dividends. Dividend will not be recorded as dividend income in the profit and loss statement. The dividend will reduce the cost of investment in the balance sheet.
For example, Staffline declared SGD 5 million of dividend, and HRnetGroup will receive SGD 1million. HRnetGroup will increase cash by SGD 1million when dividend is paid and reduce “Investment in associates” by SGD 1million.
Business of Staffline Group plc
Established in 1986, and admitted to the Alternative Investment Market (AIM) of the London Stock Market in 2004, Staffline has two business divisions: Recruitment and PeoplePlus. Recruitment specialises in providing complete and flexible labour solutions in the agriculture, food processing, manufacturing, e-retail, driving and logistics sectors. Staffline Recruitment finds work for in excess of 60,000 people every day. They support clients across a wide range of industries, including major supermarkets, as well as big fashion and high street names. PeoplePlus is a leading adult skills and training provider in the UK, delivering apprenticeships, adult education, prison education and skillsbased employability programmes across the country, with an objective to build competencies and create a skilled workforce. Staffline has also surged ahead with its rapid adoption of new technologies, including its AI chatbot FLIN delivering ‘always on’ communication, the Universe platform – a bespoke game-changing candidate engagement platform – and its industry-leading customer experience management programme ‘Have your Say’, delivering the highest standards of fulfilment, retention and worker engagement.
Resignation of Staffline auditor
An article by ICAEW announced that PwC resigns as an auditor of Staffline, this poses as negativity for investors, as the article have mentioned excepts of the letter of resignation.
“On 29 January 2019, PwC received an email from an anonymous third party raising concerns regarding certain of the group’s practices, accounting and disclosures in relation to payroll and related accruals, including non-payment of amounts due to employees and related accounting entries and accruals, sales invoicing in relation to VAT liabilities, contractual disputes and other claims, management of reported results, and the non-disclosure of information to PwC and to other third parties in relation to these matters.”
This should raise some concerns by investors investing in both Staffline and HRnetGroup, and to keep a close eye on the matter.
Net loss in FY18
Staffline group posted a net loss of £8.5 million in FY18, this was mainly due to exceptional items listed as follow:
- GBP 15.1m provision for National Minimum Wage(NMW) remediation and penalty
- GBP 10.6m reorganization cost for Work Programme exit
- GBP 11.8m amortization of intangible assets arising on business combinations
- GBP 8.1m of asset write down and one-off acquisition-related and audit fee
The adjusted net profit without exceptional items will be 28.8 million.
Coupled with the resignation of Staffline auditor, investors should question will such exceptional items be recurring in nature, such as provision for NMW and reorganizational cost?
If such an exception item still persists, investors should expect a negative impact on HRnetGroup P&L. However, based on HRnetGroup presentation slides, Staffline’s Board expects adjusted EBIT to be in the range of GBP 23-28m for 2019.