Summary:
An emerging business model in a sizeable market:
As at August 2017 there were over c.200,000 jobs vacant in Australia – the majority in blue collar occupations, with some national firms having in excess of 1,000 jobs vacant at any point in time. This is the demand side of the emerging Konekt business model, as it transitions from its traditional injury management business model. Konekt has strong existing relationships with many of these significant corporate and government employers through its injury management and pre-employment services. Konekt has a significant opportunity to match the labour supply it has access to with the large pool of labour demand/vacancies mentioned. The company is in the relatively unique position of having the resources and scale to place large numbers of employees into vacancies at significant national corporate and government employers. Konekt also has the added advantage of being able to offer a range of other pre-employment screening/assessments and injury and mental health management services to these employers.
The benefits to society of having unemployed, disabled and injured workers return to the workforce (and off government benefits) is likely to see Konekt’s services continue to be well supported irrespective of the government of the day.
Clear revenue and earnings growth drivers:
Konekt also has material margin expansion opportunities looking forward. The company is currently only offering one return-to-work service from each of its offices. Given rent is c.10- 12% of total costs and there is excess space in many offcies, margins and productivity could be significantly improved if Konekt can offer two return-to-work services (eg. both injury and unemployed) from the same office. And in the event that Konekt decides to enter the disability return-to-work market (and are awarded a contract) then it could offer three services from the one location, which would mean further margin upside.
Mission Providence acquisition:
A key focus at the company’s recent AGM was updating the market on this acquisition. Pleasingly, Konekt management mentioned that there have been no surprises following completion and that the business is tracking to expectations. The acquisition diversifies Konekt’s existing revenue streams, and enhances its ability to provide return-to-work employment services, to complement its existing core offering of delivering return-to-work injury management programs – essentially managing the process of rehabilitating injured workers and getting them back into jobs, where it is the current national market leader.
Konekt management noted the acquisition also provides Konekt with the capacity to enter new or underserviced markets. The logical potential new market here is for the company to provide return-to-work disability employment services – an attractive opportunity with the Federal Government’s 2017 budget highlighting an additional investment of over $3 billion in disability employment services to help people with disabilities get and keep long-term jobs.
Private equity interest in the sector is building:
Guidance:
On an attractive valuation:
This is the type of smaller company we get out of bed for, and we look forward to supporting and building upon our shareholding over the long term.