I disagree with the roll-up label for a few reasons:
1. Incentives: Insiders hold ~60% of the equity, worth over A$700M. A founder isn't going to risk a half a billion stake to chase acquisition fees. The skin in the game is as clear as it gets.
2. Acquisition Discipline: Look at how the WorkPac deal was structured. It’s essentially self-funding. With only A$40.2M paid upfront and the remaining earn-outs covered by WorkPac’s own future cash flows, the business is effectively paying for itself. This isn't a risky roll-up; it's a disciplined, capital-light move to secure a labor engine.
3. Organic Growth: A roll-up uses acquisitions to mask a dying business. Tasmea just reported 12% organic growth and margin expansion to 13.7%. The core business is thriving and becoming more efficient, not just getting bigger.
4. Pricing Power: Referencing 2014-2015 is a mistake. Today, Tasmea has about 80% recurring maintenance revenue through 100+ MSAs. By owning WorkPac, they’ve vertically integrated their labor supply. In a labor-starved market, they have a huge defensive moat and pricing power that didn't exist ten years ago.
I was referring to the standard definition of roll-up: a strategy of buying and combining multiple smaller businesses in the same industry into one larger company.
I am saying the consensus is likely underestimating the cyclicality of TEA's businesses.
(2) Would you know how much of TEA's revenue was from recurring maintenance during the previous downturn in FY15 to FY17?
What is the overlap between TEA's business back in FY15 and today's TEA?
(3) I would also highlight that recruitment agencies are typically cyclical. I can't find strong data that WorkPac is an exception.
How do you assess the cyclicality in WorkPac's business, if any?
About Workpac: You’re right that standard recruitment is cyclical, but you have to look at how Tasmea will use Workpac. It won’t be run as a standalone agency betting on general market hiring. They acquired them to secure labor. In a tight labor market that is much more valuable for Tasmea than the Workpac standalone business.
The 13.7% EBIT margin has actually expanded during a very tight labor market in Australia over the last few years.
For me that’s the best proof that they can manage these hourly rate cycles effectively. It shows that their clients care less about the hourly rate and more about the cost of downtime. They will pay a premium to a company that can actually show up with a qualified crew. You need to make a difference between general labor hire and the specialist trades Tasmea provides.
If your argument was correct, their margins would have decreased during a tight labor market.
Obviously that’s true what you say. However Workpac is not a financial investment but a strategic investment. Even Workpac wouldnt make any profit, it would still be a very valuable investment long term. Having the guaranteed skilled workforce available anytime, will be one of biggest competitive advantages over the next years.
Comparing with 2015 and now is comparing 2 different businesses.
There is very few overlap between the 2015 business and today’s Tasmea. In those years they were a smaller firm, focused on project-based work. It didn't have the 100+ MSA
These days, over 80% of revenue is recurring maintenance. The difference is that in 2015, they were doing discretionairy projects, which miners cut first in a downturn.
Today, they do non-discretionary fixed-plant maintenance. Miners can't stop maintaining a processing plant or water system just because the iron ore price dips. If they do, the site shuts down.
1. TEA likes to tell the story that all they do is maintenance, but I invite you to spend a few minutes reading their documents and tell me if that story is the current reality. (IMO: no.)
2. The tighter the market for skilled labor, the more money TEA makes. Because they provide the skilled labor.
I appreciate the research, but I'm going to a little bit of push-back:
1. The question relevant to the stock picker is not "cyclicality" but wether this cyclicality is priced in. In other words, what are midcycle earnings, corrected for the cyclical factors -- the ones I see are: hourly rates* (for the hours billed), iron ore rigs, and construction capex (e.g. power lines).
2. About the potential conflict of interest: I think they have a greater incentive to help TEA.
* Mader's IPO document has useful data on hours billed and therefore hourly rates, for past years. It's not hard to work out that we're meaningfully higher today.
You are right that the key question is whether the cyclicality is priced in.
The consensus seems to be underestimating the cyclicality in TEA's business. At least that's what I gather off Substack. Some are expecting sustained double-digits earnings growth.
Thanks for highlighting the fact that hourly rates are now meaningfully higher today.
How would you interpret this? For someone new to the industry like me, it seems to signal that we are beyond midcycle earnings already
Just like you I've noticed that most folks who talk about this stock seem blissfully unaware that it's cyclical. But these tourists are likely not the stock price (the market is pretty efficient in companies this size).
To your question, here's how I look at it (caviat: I'm not an industry expert at all):
- Yes I think we're above midcycle margins and this will not last forever.
- At whatever "normal" margins you assume, the underlying revenue growth from M&A is very, very high if they achieve any meaningful cross-selling. Not to mention upside from any multiple rerate acknowledging their M&A runway (an argument that was easier to make 1-2 years ago than it is today) or cost synergies.
- In the end, our short-term IRR will depend on how soon margins will normalize. I don't have the answer here. If we consider the mining industry, I think cycles can be anything from a few years to a decade-plus.
I disagree with the roll-up label for a few reasons:
1. Incentives: Insiders hold ~60% of the equity, worth over A$700M. A founder isn't going to risk a half a billion stake to chase acquisition fees. The skin in the game is as clear as it gets.
2. Acquisition Discipline: Look at how the WorkPac deal was structured. It’s essentially self-funding. With only A$40.2M paid upfront and the remaining earn-outs covered by WorkPac’s own future cash flows, the business is effectively paying for itself. This isn't a risky roll-up; it's a disciplined, capital-light move to secure a labor engine.
3. Organic Growth: A roll-up uses acquisitions to mask a dying business. Tasmea just reported 12% organic growth and margin expansion to 13.7%. The core business is thriving and becoming more efficient, not just getting bigger.
4. Pricing Power: Referencing 2014-2015 is a mistake. Today, Tasmea has about 80% recurring maintenance revenue through 100+ MSAs. By owning WorkPac, they’ve vertically integrated their labor supply. In a labor-starved market, they have a huge defensive moat and pricing power that didn't exist ten years ago.
Thomas,
Thank you for sharing your perspectives.
(1) I did not say the business is dying.
I was referring to the standard definition of roll-up: a strategy of buying and combining multiple smaller businesses in the same industry into one larger company.
I am saying the consensus is likely underestimating the cyclicality of TEA's businesses.
(2) Would you know how much of TEA's revenue was from recurring maintenance during the previous downturn in FY15 to FY17?
What is the overlap between TEA's business back in FY15 and today's TEA?
(3) I would also highlight that recruitment agencies are typically cyclical. I can't find strong data that WorkPac is an exception.
How do you assess the cyclicality in WorkPac's business, if any?
About Workpac: You’re right that standard recruitment is cyclical, but you have to look at how Tasmea will use Workpac. It won’t be run as a standalone agency betting on general market hiring. They acquired them to secure labor. In a tight labor market that is much more valuable for Tasmea than the Workpac standalone business.
4. They are still exposed to supply and demand for labor (hourly rates), which is very cyclical in the mining industry
The 13.7% EBIT margin has actually expanded during a very tight labor market in Australia over the last few years.
For me that’s the best proof that they can manage these hourly rate cycles effectively. It shows that their clients care less about the hourly rate and more about the cost of downtime. They will pay a premium to a company that can actually show up with a qualified crew. You need to make a difference between general labor hire and the specialist trades Tasmea provides.
If your argument was correct, their margins would have decreased during a tight labor market.
Thomas,
Frederik is right on this one: The tighter the labour market, the more money recruitment agencies like WorkPac make.
That’s why recruitment agencies in Japan are doing so much better. The labour market there is very tight.
I can say this with some confidence. I’ve studied the recruitment industry when I wrote my thesis on HRnetGroup Limited (CHZ; HRNET SP).
You can learn more about the recruitment industry here: https://angsanaanderson.substack.com/p/thesis-hrnetgroup-limited-chz-hrnet?r=5rl2u5&utm_medium=ios
Obviously that’s true what you say. However Workpac is not a financial investment but a strategic investment. Even Workpac wouldnt make any profit, it would still be a very valuable investment long term. Having the guaranteed skilled workforce available anytime, will be one of biggest competitive advantages over the next years.
Comparing with 2015 and now is comparing 2 different businesses.
There is very few overlap between the 2015 business and today’s Tasmea. In those years they were a smaller firm, focused on project-based work. It didn't have the 100+ MSA
These days, over 80% of revenue is recurring maintenance. The difference is that in 2015, they were doing discretionairy projects, which miners cut first in a downturn.
Today, they do non-discretionary fixed-plant maintenance. Miners can't stop maintaining a processing plant or water system just because the iron ore price dips. If they do, the site shuts down.
Thomas:
1. TEA likes to tell the story that all they do is maintenance, but I invite you to spend a few minutes reading their documents and tell me if that story is the current reality. (IMO: no.)
2. The tighter the market for skilled labor, the more money TEA makes. Because they provide the skilled labor.
I appreciate the research, but I'm going to a little bit of push-back:
1. The question relevant to the stock picker is not "cyclicality" but wether this cyclicality is priced in. In other words, what are midcycle earnings, corrected for the cyclical factors -- the ones I see are: hourly rates* (for the hours billed), iron ore rigs, and construction capex (e.g. power lines).
2. About the potential conflict of interest: I think they have a greater incentive to help TEA.
* Mader's IPO document has useful data on hours billed and therefore hourly rates, for past years. It's not hard to work out that we're meaningfully higher today.
Thanks for sharing your insights!
Frederik,
You are right that the key question is whether the cyclicality is priced in.
The consensus seems to be underestimating the cyclicality in TEA's business. At least that's what I gather off Substack. Some are expecting sustained double-digits earnings growth.
Thanks for highlighting the fact that hourly rates are now meaningfully higher today.
How would you interpret this? For someone new to the industry like me, it seems to signal that we are beyond midcycle earnings already
Just like you I've noticed that most folks who talk about this stock seem blissfully unaware that it's cyclical. But these tourists are likely not the stock price (the market is pretty efficient in companies this size).
To your question, here's how I look at it (caviat: I'm not an industry expert at all):
- Yes I think we're above midcycle margins and this will not last forever.
- At whatever "normal" margins you assume, the underlying revenue growth from M&A is very, very high if they achieve any meaningful cross-selling. Not to mention upside from any multiple rerate acknowledging their M&A runway (an argument that was easier to make 1-2 years ago than it is today) or cost synergies.
- In the end, our short-term IRR will depend on how soon margins will normalize. I don't have the answer here. If we consider the mining industry, I think cycles can be anything from a few years to a decade-plus.
Liked reading this writeup - answered the outstanding Qs I had about TEA, and uncovering the potential conflict of interest was a very good find.