Staffline (LSE: STAF) is an AIM-listed penny share that’s been on fire recently. Since the turn of the year, it’s jumped 100% to reach 46p.
However, if savvy investors had bagged Staffline stock at just under 19p in early February, they’d currently be sitting on a 149% gain. Or £24,900 from a £10,000 investment.
Zooming further out though, the Staffline share price is down a staggering 96% since the start of 2019! Ten grand invested back then would be worth just four hundred quid today, even after the stock price surge this year.
Labour outsourcing
For those wondering, Staffline is a recruitment company that specialises in blue-collar sectors. It gets staff in for the likes of Tesco, Morrisons, and BMW. It also has a strategic partnership with An Garda Síochána — Ireland’s national police service — to handle recruitment for a variety of civilian roles.
Looking at the stock, I can see a number of attractive things. Firstly, the price-to-sales (P/S) ratio is just 0.06. At such an incredibly low multiple, I’d expect Staffline to be reporting significant losses. But it’s not.
Indeed, according to forecasts, earnings are expected to jump 50% in 2026. This puts the the stock on a forward-looking price-to-earnings (P/E) ratio of just 8.5. Again, that’s cheap.
Also, it’s encouraging that Staffline has been using share buybacks to take advantage of this. It has acquired 19% of equity over the last 20 months at an average price of 32p, all from trading cash flow.
Another thing worth noting is that Staffline is growing its top line. Next year, it’s expected to report around £1.23bn in revenue, up from £993m in 2024 (14% higher than the year before).
Thin margins and pricing power concerns
On the other hand, I see some key things that I don’t like. There’s no dividend, for one. It axed the payout in 2019 following a string of profit warnings, allegations of minimum wage underpayments, and mounting financial pressure.
This is what pushed the share price — and investor trust in the firm — off a cliff. Not ideal.
Meanwhile, the low P/S ratio means investors are effectively paying just 6p for every £1 of Staffline’s revenue. But that doesn’t convert to much profit because the underlying operating margin is barely above 1%.
The risk with this wafer-thin margin is that if demand weakens or the economy tanks, Staffline’s earnings could quickly take a big hit. There’s very little cushion.
Moreover, clients like supermarkets and logistics firms — which also have low margins — negotiate hard. Consequently, I worry about how much pricing power recruitment agencies ultimately have.
After all, there will always be rivals keen to get into Tesco warehouses. If another agency can supply similar workers at a lower cost, big clients could jump ship.
Therefore, I’m not interested in buying shares of the labour outsourcer myself.
A comeback play
Having said that, Staffline has all the hallmarks of a turnaround story. There’s rising revenue and earnings, coupled with ongoing share buybacks and a cheap valuation.
And after disposing of PeoplePlus for £12m, it has strengthened the balance sheet and has cash to fund organic growth.
Weighing things up, I think the recovery has further to run, so risk-tolerant investors might want to take a closer look at this 46p penny stock.
