EMPRESARIA GROUP (EMR)

Previous Stock Tip

These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

EMPRESARIA GROUP (EMR): Moves into Malaysia - Mar 2007

RHPS Recommendation - HOLD

Empresaria has strengthened its international presence in Asia by adding a new operation in Kuala Lumpar. Empresaria is now in more than a dozen countries in Europe, Asia, Australasia and North America. It has reported a strong finish to 2006, and said that 2007 has started well. With the share price now above my 88p buy limit,

Totally missed by the City! Fast-growing recruitment stock could deliver 70% gains by next autumn - Oct 2006

RHPS Recommendation - BUY

At last! I meet with 10 or more new companies each and every month. But last week I met a small firm with a big idea that's also got more than hopes and dreams...more than just a business plan and a begging bowl...and much more than just hype. In fact, this company has a terrific record, a tried and tested formula for growing its business, and every chance of becoming a great deal bigger.

Yet its profile is surprisingly low. True, it is not in an industry that sets the pulses racing. Recruitment is a big business, but not a very sexy one. And while plenty of recruitment agencies have been quoted on the stock market, few of them have ever achieved more than the odd moment of glory.

But the two men I just met are well aware of this. They also understand exactly why such a "flash in the pan" happens - and they look set to keep their current success running.

Great experience plus a proven growth model

Tony Martin and Miles Hunt are respectively chairman and chief executive of Empresaria plc. Between them they hold just over 20% of the company's shares. I advise you to take a position alongside them today. Martin built up one of the true stock market successes in the recruitment industry, Select Appointments. It was ultimately sold in 1999 to the giant Vedior Group for £1.1bn. Miles Hunt set up Empresaria in 1996, and his first chairman was David Telling, a name you may know.

Telling was the man behind another great stock market success story, the Mitie Group. It's still going strong today with a £620m market cap and a place in the FTSE 250 index. David Telling's formula for growth was simple but highly effective. He would buy a controlling share in a private company, help its owner to finance and grow the business, and then eventually buy out the remainder in exchange for shares in Mitie. The more successful the business was, the more Mitie shares were paid to the vendor. This incentivised the vendors, but also kept them happy because they found that the value of their Mitie shares steadily rose. Yes, this was partly because of the success of the underlying businesses, of course. But there was one other trick to it. You see, the private companies that Telling bought to expand his business always cost less, on a price/earnings basis, than shares in his own firm. So each deal boosted Mitie's earnings by more than they cost, and accordingly pushed its share price higher. It also meant that the owners of private businesses who sold out to Mitie, paid in Mitie shares, ended up making even more money than they first expected. That gave them a warm feeling towards Mitie and David Telling, encouraging other business owners to sell up, too.

Sadly Telling died in 2003, but his business model lives on. And it's this model now powering the hugely impressive growth of Empresaria.

"Fair value" says EMP is a raging buy today

It has already delivered the sort of numbers which small companies can only hope to achieve. Including the forecasts for this calendar year, turnover will have more than trebled since 2001. The pre-tax profit will have gone from £0.7m to nearer £2.8m, and the all important earnings per share will have risen from 1.1p to 7.2p.

Despite this, however, the share price is just 83p, which means that our old friend the PEG ratio - showing the company's price/earnings ratio divided by the rate of earnings growth - is much cheaper than the "fair value" figure of 1. In fact, it trades at just 0.372 on next year's forecasts! In other words, this is a growth stock totally missed by the stock market. That means we should be able to enjoy a double whammy. First, the shares are likely to move up in line with the growth of earnings. But secondly, once other investors sit up and take notice, they will surely be prepared to pay a higher price for the shares in terms of the P/E ratio.

There is more to Empresaria's strategy than just acquiring private companies on the cheap, however. To avoid suffering too much from a downturn in any one sector - such as the National Health Service, for example, which put the brake on recruitment at the end of 2005 - Empresaria has built up a list of 31 trading subsidiaries. They recruit staff across a range of industries, including financial services and construction, as well as the public sector.

Empresaria has also made sure that its revenues are split between providing temporary and permanent staff. Demand for full-timers quickly falls away if the economy cools. But Miles Hunt, the company's founder, has realised that his firm is still at the mercy of the UK economic cycle. So in the last year, he's turned his attention to new overseas markets.

Hunt has bought recruitment companies operating in Tokyo, Atlanta, Sydney, Shanghai, Bangkok, Prague and Bratislava. This not only diversifies Empresaria's earnings stream, but also places it in some very fast growing and dynamic economies. The third pillar of Empresaria's strategy is the growth of the subsidiaries themselves. Any privately-owned recruitment company must be capable of growth if it is to join Empresaria. Indeed, it must be hungry for success. And if it fails to deliver this growth, then Empresaria's small central management team is not slow to close it down or change the management.

Now about 20% of Empresaria's income comes from international operations, and this is going to grow. The opportunities are almost limitless. Shanghai alone has a £6bn staffing market, supporting 500 different companies. And back in this country, Empresaria has just announced its latest acquisition, EUResource Limited, a company that specialises in the recruitment of Eastern European workers for UK clients. This deal has been done using the typical formula - an upfront payment in cash and shares for 51% of the business, with deferred payment based on EUResources' results. And there is every likelihood that it will give a further boost to Empresaria's very impressive record, too.

RHPS Verdict: The secret to Empresaria is its strategy for acquiring ambitious private businesses. Its track record speaks for itself, and its magic formula could deliver for many years to come. This is completely unrecognised by the low rating of the shares, however. So set a 12-month target of 150p today and buy.

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The figures refer to the past and past performance is not a reliable indicator of future results. The past recommendation highlighted here is a small company share.By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. These figures do not include the bid-offer spread, unless otherwise stated. Since the service began on 01/12/98 running through to 31/07/07, the average overall performance of the shares recommended is up 19.91%.All gains exclude dividend payments and dealing costs, unless otherwise stated. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances. Full portfolio available on request. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No. 115234.

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