APM Human Services: How analysts and insiders got it wrong

APM Human Services (ASX: APM) was a stock under substantial insider accumulation in 2023 and loved by analysts for its position as a high quality provider of employment and government services.

But it nosedived -40% on Thursday after a downbeat first-half trading update, extending its 12-month decline to now -67%.

APM 12-month price chart (Source: Market Index)

FY24 Surprises to the Downside

APM provided a first-half FY24 trading update on Thursday, which acknowledged that things have gone from bad to worse due to:

• Continuation of current labour market conditions driven by sustained, historic low levels of unemployment and reduced client flows into employment services programs,

• This leads to lower volumes of placements particularly impacting Australia and the UK businesses,

• Continued tightness in the market for recruitment of allied Health professionals, and

• Impact of higher interest costs and taxes.

Preliminary and unaudited results for the first half sit at $1.14 billion revenue, underlying EBITDA of $148 million and underlying net profit (ex-amortisation) of $55 million.

In the first half of FY23, the company reported $853.7 million revenue, $167.4 million underlying EBITDA and $85.4 million in underlying net profit.

Ratings Begin to Falter

UBS analysts downgraded the stock from a Buy to Neutral with a $1.27 target price (down from $3.00). The first half FY24 EBITDA and net profit figures were 14% and 22% below UBS estimates.

"Whilst APM is a high quality and best in breed operator, the ongoing challenging operating environment, worsening revenue quality/mix and implied operating deleverage create material headwinds," the analysts said.

"Caseloads continue to reduce (making the remaining pool more difficult to place) ... We prefer to wait for a reasonable improvement around some of these issues, before potentially taking a more positive stance."

To add some perspective, here's what Goldman Sachs was saying about the stock back in May 2023:

• "We believe this contract win, and others recently announced, demonstrates APM’s strong competitive position as a high quality provider of government services; we expect further contract wins to be a key catalyst moving forward."

• "The current share price presents a compelling opportunity, and we reiterate our Buy rating with our 12m TP of A$3.75 offering 84% upside."

Pivotal Questions

The UBS note provided answers to two key questions:

• Can APM recover to historical underlying earnings: "We believe so, however in our view, the current low unemployment rate needs to increase materially and unless there is a change in the online platform for Workforce Australia, this adds a further 12 month delay in the overall recovery profile."

• Can APM win >$75m of new contracts: "Yes - APM is a top tier global player, with a strong track record of winning and delivering on contracts. Opportunities within North America remain strong, while we see further opps within Sweden and within the NDIS."

Insider Pain

APM was under substantial insider accumulation in 2023.

Chief executive Michael Anghie and founder Megan Wynne purchased a collective $10 million worth of shares at a weighted average $1.81.

Wynne currently holds a total of 314.3 million shares or a little over 20% of the company.