Better-than-expected results drive up shares in recruitment consultant Staffline (STAF:AIM) by 10.9% to 545p, reversing the weak share price performance seen over the past week. That was caused by insurance mis-selling allegations which chief executive officer Andy Hogarth says are completely unfounded. Talking to Shares, he says the issue has already been reviewed and dismissed by financial regulator the FCA.
The matter reached the House of Commons last week when shadow business secretary Chuka Umunna said he had received evidence that six recruitment agencies including Staffline had profited from selling personal accident insurance to workers that they didn't need.
Hogarth says the matter was first raised by labour union Unite a year ago when it presented a complaint from 12 of Staffline's workers to the financial regulator. 'They investigated and said there was no case to be answered,' replies the CEO.
The allegations suggest that workers don't need the insurance as they are already covered by their employers. Hogarth says this is incorrect. 'We offer a benefits package for £2.95 a week including personal accident cover which has nothing to do with employer's liability insurance. To claim on the latter, you have to prove the employer was liable. Our cover means we pay out 75% of gross wage for a year if you have an accident and cannot work; no liability needs proving. If you are trying to live on £300 to £400 a week and have no savings, these benefits can be very useful.'
Hogarth says Staffline generates up to £1.5 million revenue per year from the scheme, a third of which is profit to the company. Forty percent of individuals getting jobs through Staffline pay for the scheme. 'In the scheme of our group results, it really isn't important. I wouldn't sell the benefit if I didn't think it was worth it to the individual.'
Staffline made £416.2 million revenue in 2013 and adjusted pre-tax profit of £12.5 million. The results exceeded analyst forecasts even after making investments into the business which dampened profitability within the recruitment services business.
The company, which is a running Shares Play of the Week, has a plan to 'Burst the Billion' which means having £1 billion revenue by 2017. That figure can be misleading as it includes the salaries of candidates it places into jobs. Perhaps a better way of looking at the growth plan is the £30 million pre-tax profit target.
There's a few setbacks emerging from today's results that would imply this figure may not be achievable. Yet there isn't reason to get too worried as Hogarth reveals the Burst the Billion target has plenty of room for error. 'If we hit all our internal targets, we'd actually achieve £53 million pre-tax profit'.
That wiggle room is good news given that its expansion into white collar recruitment hasn't got off to a good start. Staffline is suffering from its market reputation of being a blue collar specialist. Hogarth says companies aren't yet convinced that's the same skill set for getting white collar workers. Yet he hopes that two Irish call centre wins will act as valuable reference sites.
Hopes have also faded for picking up Welfare to Work contracts from rivals, at least in the near-term. There were signs that the worst performing agencies running schemes to help long-term unemployed get back into work would lose their contracts. Staffline is one of the best performers and was seen as being a natural candidate to take on the additional business. But political changes have seen the switch de-prioritised. Hogarth says recruitment industry consolidation may now return, so that could be a way of getting extra contracts.