Company Reports

We keep our AUD 2 fair value estimate for no-moat APM Human Services, which is now in line with our stand-alone assessment, previously AUD 2.40. The firm provided fiscal 2024 guidance of underlying EBITDA between AUD 280 million and AUD 290 million and underlying net profit after tax before amortization, or NPATA, between AUD 95 million and AUD 105 million. The midpoints imply second-half fiscal 2024 underlying EBITDA and underlying NPATA fell 7% and 18%, respectively, compared with first-half fiscal 2024. This contrasts with management previously guiding to a stronger second half for both earnings metrics on Feb. 28, 2024, and our prior expectations for second-half fiscal 2024 underlying EBITDA and underlying NPATA to increase 11% and 19%, respectively, compared with first-half fiscal 2024. We significantly cut our near-term EBIT forecasts by 18% on average over the next two years, given that lower unemployment likely affects profitability more than we expected. This earnings volatility is reflected in our unchanged High Uncertainty Rating.

APM Human Services International’s strategy revolves around maintaining its superior service levels to renew existing contracts and gain market share at key government retenders. Over a government contract, which is typically longer than five years, slight market share gains and losses can arise if certain employment service areas, or ESAs, experience faster growth or from reallocation due to contract underperformances. However, inorganic growth has been a key strategy for APM to expand more effectively and service new ESAs outside of government retenders. Industry players may expand their footprint of physical offices into new ESAs but would still need a licence to operate in a new region. Greater scale allows APM to better leverage its personnel, locations, and brand awareness, and allows it to apply learnings and replicate service offerings more easily across its global operations.

Following the end of its exclusivity period, CVC Asia Pacific withdrew its nonbinding cash offer of AUD 2.00 per share for no-moat APM Human Services. This was surprising to us, given the offer was below our unchanged stand-alone fair value of AUD 2.40. Nevertheless, we maintain our AUD 2.00 per share fair value estimate as the firm has been approached by other potential bidders. We expect an update on any potential offer before APM shares recommence trading, expected by April 5, 2024.

APM Human Services International’s strategy revolves around maintaining its superior service levels to renew existing contracts and gain market share at key government retenders. Over a government contract, which is typically longer than five years, slight market share gains and losses can arise if certain employment service areas, or ESAs, experience faster growth or from reallocation due to contract underperformances. However, inorganic growth has been a key strategy for APM to expand more effectively and service new ESAs outside of government retenders. Industry players may expand their footprint of physical offices into new ESAs but would still need a licence to operate in a new region. Greater scale allows APM to better leverage its personnel, locations, and brand awareness, and allows it to apply learnings and replicate service offerings more easily across its global operations.

APM has won several new employment services contracts in North America with a combined contracted revenue of roughly AUD 1 billion over five years. This includes a significant employment services contract in Toronto, Canada commencing late fiscal 2025. Accordingly, we have increased our revenue forecasts by 5% on average over our 10-year forecast period. However, the positive valuation effect is largely offset by a reduction in our gross margin forecasts by 50 basis points on average to 29% at midcycle. The North American market primarily operates on lower-margin cost-plus and cost-reimbursement contracting models. As a result, our earnings estimates only increase marginally.

APM Human Services International’s strategy revolves around maintaining its superior service levels to renew existing contracts and gain market share at key government retenders. Over a government contract, which is typically longer than five years, slight market share gains and losses can arise if certain employment service areas, or ESAs, experience faster growth or from reallocation due to contract underperformances. However, inorganic growth has been a key strategy for APM to expand more effectively and service new ESAs outside of government retenders. Industry players may expand their footprint of physical offices into new ESAs but would still need a licence to operate in a new region. Greater scale allows APM to better leverage its personnel, locations, and brand awareness, and allows it to apply learnings and replicate service offerings more easily across its global operations.

CVC Asia Pacific has increased its nonbinding offer to acquire no-moat APM by 25% to AUD 2 cash per share. This follows the APM board unanimously rejecting CVC’s initial offer of AUD 1.60 cash per share on Feb. 19, 2024. We think the revised proposal better reflects APM’s long-term fundamental value, representing a smaller discount to our previous AUD 2.40 fair value estimate for APM. We think the likelihood of the revised deal closing is high and have accordingly decreased our fair value estimate for APM by 17% to AUD 2 per share.

CVC Asia Pacific made a nonbinding offer to acquire no-moat APM for AUD 1.60 cash per share. While good news for APM shareholders, at a 93% premium to the last close, we think the offer price undervalues APM as a stand-alone business, representing a 33% discount to our unchanged AUD 2.40 fair value estimate. We agree with the APM board that has unanimously resolved not to pursue the proposal on the basis it undervalues APM. Despite this conclusion, we surmise the market has caught wind of APM’s long-term fundamental value and is possibly waiting for further developments.

APM Human Services International’s strategy revolves around maintaining its superior service levels to renew existing contracts and gain market share at key government retenders. Over a government contract, which is typically longer than five years, slight market share gains and losses can arise if certain employment service areas, or ESAs, experience faster growth or from reallocation due to contract underperformances. However, inorganic growth has been a key strategy for APM to expand more effectively and service new ESAs outside of government retenders. Industry players may expand their footprint of physical offices into new ESAs but would still need a licence to operate in a new region. Greater scale allows APM to better leverage its personnel, locations, and brand awareness, and allows it to apply learnings and replicate service offerings more easily across its global operations.

We decrease our fair value estimate for no-moat APM Human Services by 11% to AUD 2.40. We significantly cut our near-term EBIT forecasts by 29% on average over the next two years given current headwinds. We think labor shortages are likely to persist near-term in APM Human Services' health segment. The firm's recent contract wins and acquisitions in North America are likely not as profitable relative to our prior expectations, and abnormally low levels of unemployment are likely to result in depressed client flows and placement fees near term. However, our long-term estimates are relatively unchanged and shares appear oversold. While lower unemployment is currently weighing on profitability, cyclicality is inherent in APM’s business. We have increased our Uncertainty Rating to High from Medium to account for this cyclicality.

APM Human Services International’s strategy revolves around maintaining its superior service levels to renew existing contracts and gain market share at key government retenders. Over a government contract, which is typically longer than five years, slight market share gains and losses can arise if certain employment service areas, or ESAs, experience faster growth or from reallocation due to contract underperformances. However, inorganic growth has been a key strategy for APM to expand more effectively and service new ESAs outside of government retenders. Industry players may expand their footprint of physical offices into new ESAs but would still need a licence to operate in a new region. Greater scale allows APM to better leverage its personnel, locations, and brand awareness, and allows it to apply learnings and replicate service offerings more easily across its global operations.

We decrease our fair value estimate for no-moat APM Human Services by 7% to AUD 2.70. We cut our EBIT forecasts by 7% on average over the next 10 years, largely driven by lower forecast revenue from higher-margin Australia and United Kingdom segments. We are more pessimistic relative to our prior forecasts given the potential underperformance of APM Human Services' recent contract wins and acquisitions, labor shortages in the company's health segment, and continued low levels of unemployment resulting in the Australian government currently reviewing disability and employment sectors.