Today, staff outsourcing company Impellam (LSE: IPEL) reported that for fiscal 2017, revenue increased by 1.5% year-on-year although, due to an increase in investment, adjusted earnings before interest tax depreciation and amortisation fell 15.3% to £59.4m. Gross profit declined 1.1%, and basic earnings per share slumped 29.2% to 61.9p. Still, despite falling earnings, cash generation remains strong and the group was able to reduce net debt by 20% to £76m by the end of the year.
As well as an increase in investment, the most significant impact on earnings was a negative tax charge of £6.8m, compared to last year’s one-off tax credit of £4.2m. Impellam isn’t the only company to have had to book such a charge thanks to the reduction in the rate of US federal corporation tax from 35% to 21%. This reduction means that Impellam had to write-down the value of deferred tax assets on losses in its US business, primarily an accounting adjustment that should not impact the underlying business or be repeated next year.
Following these results, the global staffing business maintained its full-year dividend per share at 20.5p giving a yield of 4%.
Based on the above numbers alone, I’m in no rush to buy Impellam. However, the company’s valuation tells a different story.
Indeed, based on figures for 2017, the shares are currently trading at a P/E of 10.6. Next year, when the impact of the US tax reform has filtered through the results, earnings per share are expected to leap to 96p, implying that the shares are currently trading at a forward P/E of just 6.
To me, this valuation looks too cheap to pass up as Impellam is trading at a deep discount to both the broader market and its sector, both of which trade at a multiple of around 14 times forward earnings. What’s more, the company’s dividend is covered more than three times by earnings per share, so there’s plenty of headroom for management to maintain the payout if profits fall, or increase it further in the years ahead.
Worth the risk?
International Personal Finance (LSE: IPF) has many similar qualities to Impellam. The international sub-prime lender is unloved by the market, but this presents an opportunity for contrarian investors who are willing to take on the risk.
Based on current City figures, the shares are trading at a forward P/E of just 7.2 and support a dividend yield of 5.5%.
That said, the company does not come without its risks. As my Foolish colleague Kevin Godbold pointed out at the end of October last year, “the firm’s geographic footprint is shaping up as an uncomfortable place to be because regulatory changes and pressures are attacking the business.” Nonetheless, management is working hard to adapt the group to the changes being brought in by regulators.
At the beginning of March, CEO Gerard Ryan told news agency Reuters that as long as any caps on lending rates are “set at a reasonable level” the company can “operate very effectively within that.” In other words, the group isn’t just going to roll over. It will work with regulators and borrows to continue to offer attractive products that produce profits.
With this being the case, I believe the stock’s current valuation is too low and could offer an attractive return for investors who are willing to take a leap of faith.