What: Human services provider Spotless Group Holdings Ltd (ASX: SPO) posted a pro forma net profit of $106.6 million today, 3.1% ahead of prospectus guidance. Since hitting the ASX boards in May 2014 shares have climbed to $1.90 today, up around 18% on their $1.60 initial offer price.
Now what: The business which has a market value of more than $2 billion is a leading player in facilities management services for private and public sector clients who require cleaning, security, catering, waste management or general maintenance services.
Outsourcing these kinds of services is an increasingly common trend for businesses across Australia and Spotless has been taking advantage of this since starting out as a single dry cleaning business way back in 1946. In particular publically-funded organisations have recently taken to outsourcing certain operating functions more and more to try and save on costs. The other advantage of outsourcing services to a group like Spotless is that it should allow a business or government body to focus on its own particular services and improve efficiencies.
The challenge for Spotless then is to win and maintain business while growing profit margins. As a market leader the group enjoys a dominant position which allows it to enjoy economies of scale and slight competitive advantages over smaller rivals like Serco or Transfield Services Limited (ASX: TSE).
What of the outlook? Spotless also reaffirmed its prospectus forecasts for FY 2015, which are for an adjusted net profit of $141.8 million and strong organic growth. The group also intends to start paying a dividend in FY 2015 targeting a payout ratio of 65%-75% of adjusted net profit.
Spotless can also grow by expanding into new services, and winning market share with the tailwind of a trend towards outsourcing firmly at its back. In this sense it's not dissimilar to The Motley Fool's top growth stock for 2014. It's much smaller than Spotless and looks to be on a much better valuation.
