Nakama Group (NAK) – Recruiting for profit

Nakama Group (NAK) – Recruiting for profit

Nakama is an international recruitment business that has been listed since 1999 (previously Highams Systems Services Group). It previously traded in Australia until the closure of its Melbourne and Sydney offices in order to focus on where they can ‘own’ the market. Currently, Nakama has offices in London, Hong Kong, and Singapore. It remains firmly in nano-cap territory (latest share price of 1.2p, market capitalisation of £1.5 million).

The Highams business (established since 1983) specialises in business and technology within the insurance and wealth management sectors. Nakama operates in the digital and creative sectors for marketing, media, and technology. The business has been on my watchlist for a while as they have previously struggled to turn the business around; however, since new CEO Andrea Williams came in we have seen clear operational progress.

The opportunity

The FY 2018 results saw a significant reduction in revenue due to the loss of a high volume client in Australia. The Melbourne office was closed, and since these results the Syndey office has also closed. These businesses were not performing well and a focus on the offices that are performing strongly should benefit Nakama in the future. A goodwill impairment of £478,000 was recognised and this was a complete impairment of all outstanding goodwill values, providing a clean slate for the future. As of the Final Results, the company was generating net cash but this was after movements in working capital. Whilst decreasing trade receivables is good if we looked at the cash position before these movements the company was actually consuming it.

The most recent interim results (released yesterday) have now shown a change of £226,000 net cash generated by operating activities before movements in working cash. This should mean that the company will not require any cash calls and avoid the discounted placings that are so often needed to keep the lights on at many AIM companies.

The Hong Kong market has continued to grow and Singapore has performed ‘solidly’. The London business has struggled but is now coming through its restructuring phase with more short term headcount falls, and permanent recruitment revenues are expected to increase. In the future, headcount is expected to rise as the business implements its new growth strategies. The company reported net profit of £186,000, and if we assume only minor growth and full year net profit delivered £400,000 then the business would be trading on a PE of just under 4!

Technical Analysis

Nakama is now trading above all moving averages and recently saw a volume spike as First Point Group took 24.17% of equity that was (I believe) placed from Paul Goodship and Rob Sheffield.

(Source: SharePad.)

The price would need to break out from its previous high of 1.7p and then test the 2p resistance. A break of this would be incredibly bullish as the price would be well over 100% from its lows and confirming the uptrend backed by improving fundamentals. The stock is illiquid, and this must be considered in a stock that typically registers only a few trades per week!

Conclusion

I believe there is money to be made by materially changing your mind when the facts materially change, and after watching Nakama with interest for months I have finally entered the stock. It is never going to be a large position, but this is an interesting company that has removed the overhang of stock, is generating cash, and is net profitable with no goodwill impairments to come.

 

At the time of publication, the author holds a long position in NAK.

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