I would love to be a shareholder in this company.
It has a superb record... it is highly profitable... it pays a handsome dividend... it has cash in the bank.... and it is a global leader with every chance of growing its business both this year and for several years to come.
The trouble is I cannot get hold of any.
The bid/offer spread is 150p-175p and the ‘Normal Market Size’ is one thousand shares. So by the time I have allowed for dealing expenses the shares will have to rise by some 16% before I can break even.
This is an extreme case of the lack of liquidity that plagues many AIM stocks and the reason why, much as I would love to recommend these shares to readers of my Red Hot Penny Shares newsletter, I honestly can not.
A look at the Annual Report makes it pretty obvious why we have this problem. 62% of the shares are in the hands of the directors and a further 29% are held by ‘Principal Shareholders’ leaving a free float of just 9%.
These major shareholders do not want to part with their shares and I can understand why. Their company, Dillistone Group (DSG), has reported a 24% increase in earnings per share for 2007 on revenue that was up by 23%.
Such is the cash generative nature of the business that its cash balance swelled from £538,000 to £1,533,000 despite the generous dividend payments that give the shares a yield of almost 5% at the 175p offer price.
A City sparkler
You would not expect to find such an undervalued gem right under the nose of the City, but that is where I did find it, just up the road from Liverpool Street.
There I met Chairman Jim McLaughlin and Managing Director Jason Starr, who wore the relaxed smiles of businessmen who know they are on to a good thing. This good thing is software for the recruitment industry. It doesn’t sound very exciting does it? And yet Dillistone now has customers in fifty-three countries and clearly has a global reputation.
Its sells a software product called FILEFINDER which helps recruiters find the right candidate to fill a job vacancy. This is different from most software products in the industry in that, rather than simply handling the details of candidates who are looking for a job it helps recruiters to identify ‘passive candidates’ — in other words people who are not actively looking.
This has traditionally been the way in which top-end executive search firms have worked but it is now becoming more common further down the scale, for three reasons.
First of all employers naturally want the best person for the job rather than simply taking the best of those who have applied. Next there is now not only a shortage of high-powered candidates for top jobs, but owing to demographic factors there is an increasing shortage of people capable of doing jobs at the next level.
And finally as business goes global so it needs to find candidates from all parts of the world, and this requires a genuine search and the assistance of those with local knowledge.
Expansion ahead
FILEFINDER helps recruiters to manage this process and Dillistone has now expanded the product to help the recruitment of temporary and contract staff. Thanks to these innovations and its apparent global leadership it is enjoying strong growth both within the recruitment industry and within other organisations such as Merrill Lynch which have their own in-house recruitment departments.
It is gradually moving away from the license fee plus annual 20% maintenance fee model onto the ‘software as a service’ model which, while it hits profits in the short term, is ultimately more profitable.
It already has a high c.40% share of the UK market but last year won 153 new business contracts in 37 different countries. Just over half of last year’s revenue came from the UK, with about 20% from Europe, 15% from the USA and 10% from the Asia-Pacific region.
Although it can supply and install the software from London its offices in North America, Germany and Australia allow it to offer worldwide support around the clock. It markets its services at industry conferences and through mailing out its own magazine Search-Consult.
But much of its new business arises because this is an industry in which new recruitment firms are typically set up by those who are leaving larger organisations where they will have become familiar with FILEFINDER.
There is no sign that this successful formula has run its course and, despite expressing some caution about global economic conditions, a fortnight ago Dillistone reported an excellent start to 2008. Now Dillistone is considering acquisitions. It will do well to find a business as attractive as the one that it already owns — but a move of this nature may at least make it easier to get hold of some shares.
Regards,
Tom Bulford
