work service poland, temporary staffing...work service 6 august 2014 3 gdp forecasts remain skewed...

Throughout the report we use share prices as of 4 August 2014. DISCLAIMER: Disclosure statements provided on the last page of this report are an integral part of this document.

Work Service Poland, Temporary staffing

Reuters: WSEP.WA Bloomberg: WSE PW 6 August 2014

Hungry for more Recommendation Buy

Portfolio weighting -

Price (PLN, 4 August 2014) 14.4

Target price (PLN, 12-month) 19.0

Market cap. (PLNmn) 878

Free float (%) 26.1

Number of shares (m) 59.9

Average daily turnover 3M (PLNmn) 0.7

EUR/PLN 4.17

USD/PLN 3.11

The chart shows performance against the WIG index. On 04/08/2014, the WIG index closed at 50,872.

Main shareholders % of votes

Prologics UK 32.4

Work Source Investments 22.9

Mizyak Investment Fund 13.5

Doyon Holdings 5.1

Free float 26.1

Company description

Work Service is the largest HR services company in Poland, with rising regional exposition in CEE and Germany.

Research team:

Tomasz Sokolowski

+48 22 586 82 36 [email protected]

Initiation of coverage with Buy, TP set at PLN 19.0 per share

Following the completion of four takeovers in 2013/14, Work Service

is not resting on its laurels. We expect the company to maintain a

fast growth path, this time aiming at the Romanian temporary

staffing market. As well as M&A, Work Service should not slow down

its organic growth in the coming years, benefiting from its

competitive advantages, positive structural market changes and

supportive forecasts pointing to GPD growth. Based on these

factors, we see Work Service to show notable growth in sales and

net profit, which we expect to increase at 39% and 47%, on average,

over 2014–16E. In our view, Work Service is an attractive investment

that is still reasonably priced at PE’14 of 14.7x, which implies

double digit discount to peers. In this light, we are initiating

coverage of Work Service with a Buy recommendation and a 12-

month Target Price of PLN19.0/share, which offers a 31% upside

potential.

Following the successful completion of four acquisitions in 2013–14, Work Service has recently

announced that it is planning to enter the Romanian market, as well as making some selective

acquisitions in Poland in niches with sound prospects. We believe that Work Service might buy

EBIT of PLN3mn–10mn in the coming quarters. Financing will come from additional debt or a

capital increase, in our view. A long and successful track record, and close cooperation with

Pine Bridge, increase the chances for another successful acquisitions.

We believe that Work Service will grow faster than the overall market, thanks to its competitive

advantages, which include a broad portfolio of services and a flexible attitude to clients. Work

Service operates more like an HR consultant, which is its main distinguishing feature compared

to the competition. In our view, this will help the company to take advantage of underlying

positive structural changes in the HR market, as well as expected further growth in GDP.

We expect Work Service to notably improve its financial results in the coming years. We expect

sales, EBITDA and net profit to grow at an average of 39%, 37% and 47%, respectively, over

2014–16E. Work Service is poised to show strong results in 2Q14. We expect a 70% y/y

advance in sales, a 59% y/y advance in EBITDA, and net profit is expected to triple y/y. The

prime drivers will be the consolidation of recent acquisitions, coupled with strong organic

growth.

Our business model for the company yields a 12-month Target Price of PLN19.0 for Work

Service, offering a 31% upside potential versus the current share price. A comparative valuation

yields PLN16 per share. Work Service is currently trading at 14%, 12%, 16% discounts vs. peer

group on PE ratio for 2014–16E. In our view, these discounts are too great. In this light, we are

initiating coverage of Work Service with a Buy recommendation.

Work Service: Financial summary PLN in millions, unless otherwise stated

2013 2014E 2015E 2016E 2017E

Sales 918 1,677 2,172 2,482 2,366

EBITDA 53 93 118 136 129

EBIT 48 87 110 127 119

Net profit 27 60 73 84 77

P/E 33.1 14.7 12.1 10.5 11.4

EV/EBITDA 18.1 11.4 8.6 7.2 7.0

Source: Company data, DM BZ WBK estimates

Work Service 6 August 2014

2

Investment story

Work Service offers investors an interesting exposition on: 1) further dynamic

growth through M&A that will be supported by 2) fast organic growth in

advantageous market surroundings and 3) further growth in GDP. More

importantly, the exposition on such an interesting story can be built for an

attractive price, in our view. Work Service is trading at PE’14–16 of 14.7x, 12.1x

and 10.5x, which offers double-digit discounts over its peers (companies from the

US, EU and UK). The company is also trading with a discount over its fair PE level,

which we estimate at c.15x. In this light, we are issuing a Buy recommendation for

Work Service shares with a 12-month Target Price of PLN19.0 per share.

Work Service has recently become the leading player in the Polish Human Resources

market, commanding a 23% market share. The company has recently announced a

strategy based on two core pillars: 1) further strengthening of its market position in

Poland through organic growth as well as 2) further M&A transactions in the Berlin-

Moscow-Istanbul triangle.

Ad. 1

The company completed four acquisitions in 2013–14, which are likely to add PLN479mn

to sales and PLN28mn to EBITDA in 2014E. Work Service has also recently announced

that it is planning to enter the Romanian market as well as making some carefully

selected acquisitions in Poland in niches that have a good prospects. We believe that

Work Service will spend about PLN20mn–70mn on acquisitions in the coming years,

though this might easily be boosted by additional debt or capital increases. Assuming

that Work Service is looking for acquisitions at an EV/EBIT of 7.0–8.0x, new acquisitions

may boost the company’s EBIT by PLN3mn–10mn. A long and successful track record,

plus close cooperation with experienced private equity fund Pine Bridge, supports the

thesis that Work Service will successfully complete its next stage of acquisitions strategy,

in our view.

Ad. 2

Work Service aims to grow faster than the market, benefiting from: 1) a broad portfolio of

services, which combine temporary staffing and staff outsourcing, personnel counselling

and HR consultancy; 2) a flexible attitude to clients, which distinguishes the company

from competitors that suffer from rigid corporate structures. One crucial feature of Work

Service is that it operates more like an HR consultant than a regular staffing agency. The

prospects for temporary staffing alone are good, driven by structural factors such as: 1)

the desire for more flexible business models to allow rapid adaptation to shifting

demands for labour; 2) the current low penetration of temporary staffing services in

Poland (1.0%) vs. Western Europe (1.8%) and the U.S. (2.0%) and; 3) the high

percentage of temporary contracts in total labour in Poland vs. the EU average will fuel

the growth of temporary staffing services. All these factors bode well for the development

of the temporary staffing market. Poland’s temporary staffing market grew with an 8.3%

CAGR over 2009–13 and is projected to maintain a high growth rate of CAGR 5.5% until

2016E, according to forecasts.

Ad. 3

Historically, there has been a strong positive correlation between the FTE number and

GDP growth, y/y. At a time of growing GDP (falling unemployment), the number of hours

delivered by temporary staffing usually increases, leading to a growing FTE number.

Work Service is mainly exposed to these markets: Poland (60% of FY’14E sales),

Germany (14%), Hungary (13%), Czech Rep./Slovakia (6%) and Russia (5%), for which


3

GDP forecasts remain skewed toward further growth y/y in 2014-16E, which creates a

supportive background for the development of the temporary staffing industry (more on

page 15).

Key risks

Among the key risks for Work Service, we focused mainly on: 1) early signs of an

economic slowdown; 2) operating cash flow issues and high leverage; 3) potential

changes in industry regulations; 4) FX exposure; 5) potential problems with pay back

from M&A and; 6) strong competition. More about risks on page 21.


4

Valuation

DCF

In keeping with DM BZ WBK methodology, we rely on a discounted cash flow approach

in the valuation process. We have based our model on the following assumptions:

Key assumptions

Organic business

Fig. 1. Work Service: Sales breakdown for 2013–23E PLN in millions, unless otherwise stated

geographic breakdown 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Poland 714 943 1,122 1,290 1,226 1,410 1,494 1,554 1,601 1,649 1,698

chng% 24% 32% 19% 15% -5% 15% 6% 4% 3% 3% 3%

Export 204 255 301 338 355 399 431 460 490 522 557

chng% 37% 25% 18% 12% 5% 13% 8% 7% 6% 7% 7%

segmental breakdown 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

temporary staffing 600 766 904 1,026 996 1,140 1,213 1,269 1,317 1,368 1,421

chng% 24% 28% 18% 13% -3% 14% 6% 5% 4% 4% 4% outsourcing & personnel counselling 318 431 519 602 585 669 712 745 773 803 834

chng% 31% 36% 20% 16% -3% 14% 6% 5% 4% 4% 4%

Total 918 1,198 1,423 1,628 1,580 1,809 1,925 2,014 2,090 2,171 2,255

chng% 26% 30% 19% 14% -3% 14% 6% 5% 4% 4% 4%

Source: BZ WBK Brokerage research, company data

Fig. 2. Work Service: Gross profit breakdown for 2014–23E PLN in millions, unless otherwise stated

2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

temporary staffing 21 27 32 36 35 39 41 43 45 46 47

margin, % 3.5% 3.5% 3.5% 3.5% 3.5% 3.4% 3.4% 3.4% 3.4% 3.4% 3.3% outsourcing & personnel counselling 92 121 144 166 160 177 189 197 205 213 221

margin, % 28.9% 28.0% 27.8% 27.6% 27.4% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5%

Gross margin 113 147 176 202 195 216 230 241 250 259 268

margin, % 12.3% 12.3% 12.4% 12.4% 12.3% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9%


Fig. 3. Work Service: SG&A breakdown for 2014–23E PLN in millions, unless otherwise stated

2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

SG&A 64 88 104 119 116 133 141 148 153 159 165

as % of sales 6.9% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3%

sales costs 17 22 26 30 29 33 35 37 38 40 41

as % of sales 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8%

management costs 47 66 78 90 87 100 106 111 115 120 124

as % of sales 5.1% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%


M&A impact

Fig. 4. Work Service: M&A impact on Work Service financials PLN in millions, unless otherwise stated

2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Sales 479 749 854 786 903 958 996 1,026 1,057 1,088

chng% n.a. 56.2% 14.0% -8.0% 15.0% 6.0% 4.0% 3.0% 3.0% 3.0%

Gross profit 53 83 95 87 100 104 106 110 113 116

margin % 11.1% 11.1% 11.1% 11.1% 11.1% 10.9% 10.7% 10.7% 10.7% 10.7%

EBIT 27 39 44 40 46 47 47 49 50 52

margin % 5.7% 5.2% 5.1% 5.1% 5.1% 4.9% 4.7% 4.7% 4.7% 4.7%

EBITDA 28 41 46 42 48 49 50 51 53 54

margin % 5.9% 5.4% 5.4% 5.4% 5.4% 5.2% 5.0% 5.0% 5.0% 5.0%



5

• CAPEX: we conservatively assume that Work Service will pay PLN143mn in 2014E.

According to the company, it will pay PLN29mn in 2014E, and PLN114mn in 2015E.

• Cash Conversion Cycle: we assume this will increase to 25 days in 2017E, from 8 days

a year ago.

• We use a terminal FCF growth rate of 2.0%.

• We have used a 10% corporate income tax rate in 2014E, increasing it to 17% in

2018E.

• Our WACC of 9.2% includes a 3.5% risk-free rate, a 5.0% equity risk premium, 1.0

unlevered beta and a D/E ratio of 36%, based on the average amount of debt and equity

over the forecast period.

• We decided to use the net debt figure as of 2013 in our DCF analysis.

• We conservatively included the fully diluted number of shares at 60.8mn, which

includes 873k shares stemming from the management incentive scheme. We assume

that Work Service will miss the motivational scheme’s target for 2017E.

The DCF model, our prime valuation tool, yields a 12-month Target Price of

PLN 19.0.


6

Fig. 5. Work Service: WACC calculation

Risk-free rate 3.5%

Unlevered beta 1.0

Levered beta 1.3

Equity risk premium 5.0%

Cost of equity 10.1%

Risk-free rate 3.5%

Debt risk premium 3.9%

Tax rate 12.0%

After tax cost of debt 6.5%

%D 26%

%E 74%

WACC 9.2%


Fig. 6. Work Service: DCF valuation PLN in millions, unless otherwise stated

2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Net sales 1,677 2,172 2,482 2,366 2,712 2,882 3,010 3,116 3,227 3,343

EBITDA 93 118 136 129 140 147 153 159 165 170

EBIT 87 110 127 119 130 136 140 145 150 154

Cash taxes on EBIT 9 13 17 17 20 21 21 21 22 22

NOPAT 78 97 110 103 109 115 119 124 128 132

Depreciation 6 8 9 10 11 12 13 14 15 16

Change in operating WC 68 39 54 6 43 17 13 11 11 12

Capital expenditure 120 12 14 13 15 16 17 17 18 19

Net investment 181 43 59 10 47 21 17 15 15 15

FCF -103 54 51 93 62 93 102 109 114 118

WACC 9.2%

PV FCF 2014-2023E 360

Terminal growth 2.0%

Terminal Value (TV) 1,712

PV TV 712

Total EV 1,072

Net debt 76

Minorities 10

Equity value 987

Number of shares (m) 61

Value per share (PLN, 1 Jan 2014) 16

Month 8

Current value per share (PLN) 17.2

12-m Target Price (PLN) 19.0

Revenue growth 82.6% 29.5% 14.3% -4.7% 14.6% 6.3% 4.4% 3.5% 3.6% 3.6%

EBITDA growth 76.6% 26.6% 14.8% -4.8% 8.7% 5.1% 3.7% 3.9% 3.9% 3.1%

NOPAT growth 81.7% 24.3% 12.5% -6.2% 6.3% 5.1% 3.6% 3.9% 3.9% 3.0%

FCF growth n.a. n.a. -6.6% 84.3% -33.7% 50.9% 9.3% 6.9% 4.4% 3.4%

EBITDA margin 5.6% 5.4% 5.5% 5.5% 5.2% 5.1% 5.1% 5.1% 5.1% 5.1%

Nopat margin 4.7% 4.5% 4.4% 4.3% 4.0% 4.0% 3.9% 4.0% 4.0% 4.0%

Capex/Revenues 7.1% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6%

Change in WC/Revenues 4.0% 1.8% 2.2% 0.2% 1.6% 0.6% 0.4% 0.4% 0.4% 0.4%


Fig. 7. Work Service: Sensitivity analysis

Terminal growth rate

WACC 1.0% 1.5% 2.0% 2.5% 3.0%

8.2% 20.5 21.7 23.0 24.7 26.6

8.7% 18.7 19.7 20.8 22.2 23.7

9.2% 17.2 18.0 19.0 20.1 21.3

9.7% 15.8 16.5 17.3 18.2 19.3

10.2% 14.6 15.2 15.9 16.7 17.5

Source: BZ WBK Brokerage research


7

Comparable analysis

Work Service is currently trading with 14%, 12% and 16% discounts over its peers on PE

ratios for 2014–16E. On EV/EBITDA, Work Service is trading with 11% premium in

2014E and single-digit discounts in 2015-16E.

Based on comparisons of projected growth, profitability and leverage, we agree

that Work Service should be traded at a discount vs. Western peers. On the other

hand, we view the current discount as too great.

High double-digit discounts on 1- and 2-year PEG vs. peers mean, in our view, that

Work Service is an opportunity for an investor looking for growth. On the other

hand, Work Service’s higher leverage vs. peers, which should be viewed as

normal in a growth period, makes Work Service trading in line with peers on

EV/EBITDA and not paying dividends. In this light, risk-averse investors should

rather stay with developed peers that have lower business risks and DY.

Fig. 8. Work Service: Comparable valuation vs. US, EU and UK peers

P/E EV/EBITDA ROE DY

Name 2014E 2015E 2016E 2014E 2015E 2016E PEG 1Y PEG 2Y 2014E 2015E 2014E 2015E 2016E

MANPOWER 14.9 13.4 12.3 7.2 6.5 5.9 0.3 0.2 13.5% 13.9% 1.3% 1.3% 1.3%

KELLY SERVICES 19.8 9.1 n.a. 5.6 3.7 n.a. n.a. 0.5 5.0% 7.8% n.a. n.a. n.a. ROBERT HALF 22.8 19.5 18.2 12.1 10.6 9.9 1.4 0.6 34.9% 29.4% 1.5% 1.6% 1.6%

US - median 19.8 13.4 15.2 7.2 6.5 7.9 0.8 0.5 13.5% 13.9% 1.4% 1.5% 1.5%

RANDSTAD 13.8 11.5 9.9 9.3 7.7 6.8 0.2 0.1 13.8% 15.7% 3.3% 3.9% 4.5%

ADECCO 17.6 14.8 13.2 11.6 10.0 9.2 0.8 0.3 18.7% 20.6% 2.7% 3.1% 3.5%

BRUNEL 15.6 13.3 12.5 9.3 8.0 6.9 0.8 0.3 20.6% 22.1% 3.3% 3.8% 4.4%

CPL RESOURCES 16.5 14.1 12.2 12.2 10.5 9.1 1.0 0.3 18.6% 19.4% 1.7% 2.0% 2.2%

USG PEOPLE 13.5 9.8 8.1 8.8 6.9 5.9 n.a. n.a. 11.1% 14.1% 2.3% 3.3% 4.1%

EUR - median 15.6 13.3 12.2 9.3 8.0 6.9 0.8 0.3 18.6% 19.4% 2.7% 3.3% 4.1%

HAYS 19.8 16.1 12.7 11.2 9.6 8.0 0.9 0.3 35.4% 35.6% 2.2% 2.5% 2.9%

MICHAEL PAGE 24.8 18.5 14.1 12.5 9.8 7.8 0.9 0.3 24.4% 31.0% 2.6% 2.8% 3.1%

UK - median 22.3 17.3 13.4 11.8 9.7 7.9 0.9 0.3 29.9% 33.3% 2.4% 2.7% 3.0%

Median - Group 17.0 13.7 12.5 10.2 8.8 7.8 0.9 0.3 18.6% 20.0% 2.3% 2.8% 3.1%

Work Service 14.7 12.1 10.5 11.4 8.6 7.2 0.1 0.1 23.5% 22.7% n.a. n.a. n.a. prem./disc. vs. US -25.8% -9.6% -31.0% 56.9% 32.0% -9.1% -86.1% -87.3%

prem./disc. vs. EU -5.6% -8.9% -14.0% 22.0% 6.9% 4.7% -85.5% -78.7%

prem./disc. vs. GB -34.1% -30.0% -21.5% -3.8% -11.2% -9.0% -86.8% -74.7%

prem./disc. vs. Group -13.8% -11.9% -16.1% 11.0% -2.5% -8.0% -86.4% -77.8%

implied price vs. US 19.5 16.0 20.9 8.1 10.4 16.0

implied price vs. EUR 15.3 15.9 16.8 11.3 13.4 13.7

implied price vs. UK 21.9 20.6 18.4 15.1 16.5 16.0

implied price vs. Group 16.8 16.4 17.2 12.7 14.9 15.8

avg. Implied Price 15.6



8

We have compared Work Service to US, UK and EU peers with regard to:

1) business growth

Fig. 9. Work Service scores the best in terms of projected sales growth over 2014–16E In %

Sales growth

historical 10YR CAGR forecast CAGR'14-16

MANPOWER 4.9% 5.1%

KELLY SERVICES 1.5% 5.3%

ROBERT HALF 3.5% 8.8%

US - median 3.5% 5.3%

RANDSTAD 7.9% 6.0%

ADECCO 1.0% 6.1%

BRUNEL 14.8% 9.4%

CPL RESOURCES 18.8% 6.3%

USG PEOPLE 12.0% 6.6%

EUR - median 12.0% 6.3%

HAYS 2.9% 6.6%

MICHAEL PAGE 7.0% 8.6%

UK - median 4.2% 6.0%

Work Service* 15.5% 39.3%

Source: BZ WBK Brokerage research, company data, *CAGR’07-13

Fig. 10. Work Service also looks attractive on PE vs. FY14-16 sales … Fig. 11. … as well as 2YR EPS growth


2) profitability

Fig. 12. Work Service operates at a lower gross margin… Fig. 13. … while the EBITDA margin is pretty much in line,

due to better operating efficiency In % In %



9

Fig. 14. ROE is better than US and EU, while notably lower than in UK

In %


3) leverage

Fig. 15. Work Service has higher leverage vs. peers in both ratios net debt/equity and net debt/EBITDA

In %


In summary, Work Service looks much better than its competitors in terms of projected

business growth, and pretty good in terms of generated returns. In this light, Work

Service deserves a high fair PE, which we estimate at c.15x, mainly thanks to its strong

business growth and greater flexibility – a feature that distinguishes the company from

large Western corporations. Please note that our calculations assumes a debt/equity

ratio of 36%, which is based on average values from our 2014–23E projection, not the

83% as of 2014E. This assumes a scenario in which Work Service will improve its cash

flow profile (more on OCF in the risk section) and that its business will continue to grow

in terms of both revenue and profits. On the other hand, Work Service has a higher

business risk profile due to its greater leverage and exposure to riskier markets – its

peers are usually are well-established in developed markets and are net cash. In this

light, we believe that Work Service should be trading at discounts vs. Western

peers. However, in our view, the current discounts are too great.


10

Strategy

Work Service has recently became the leading player in the Polish Human Resources

market, commanding a 23% market share and outpacing global players such as

Randstad, Adecco and Manpower. The company is not resting on its laurels – Work

Service has ambitions to become a leading player in the Berlin-Moscow-Istanbul triangle.

In order to reach this long-term goal, Work Service has recently announced a strategy,

based on two core pillars:

1) Further strengthening of its market position in Poland through organic growth,

which mainly assumes the cross-selling of high-margin outsourcing and personnel

counselling services, plus tailor-made acquisitions.

2) Growth through M&A in the Berlin-Moscow-Istanbul triangle. Work Service is

mainly targeting companies operating in outsourcing and personnel counselling, which

offers higher margins than temporary staffing. The company completed four acquisitions

in 2013–14, which are likely to add PLN479mn to sales and PLN28mn to EBITDA in

2014E. Moreover, Work Service has recently announced that it is planning to enter the

Romanian market as well as making carefully selected acquisitions in niches with good

prospects in Poland.

According to the investment agreement signed with Pine Bridge in 2013, Work Service is

obliged to spend PLN250mn–300mn on further acquisitions by end-2015. While

c.PLN230mn has been spent so far, Work Service is planning to spend PLN20mn–70mn

on acquisitions in the coming years. Assuming that Work Service is looking for

acquisitions at an EV/EBIT of 7.0–8.0x, new acquisitions may boost the company’s EBIT

by PLN3mn–10mn. This acquisitions fire power may easily be boosted by additional debt

or capital increases, although we have not assumed this in our analysis.

New acquisitions to drive business – Romania is the first target

Work Service is primarily targeting Romania. It plans to enter this HR market by taking

over a company that places temporary IT specialists. Work Service sees opportunities

arising from the large availability of young and well-educated IT specialists in the

country, as well as the salary differences between Romania and EU countries (mainly

Germany). Work Service is also looking for Polish companies that would complement the

services currently in the company’s portfolio. Last but not least, Work Service will not

change its strategic foundation, which assumes the acquisition of companies that are in

the top three in their segments or operating in an attractive niche. Work Service is

currently in talks with several companies, but it is too early to give any details.

In our view, a long and successful track record supports the thesis that Work Service will

successfully meet its acquisition targets. The company managed to take over five

companies during 2008–12, summarized below:

Fig. 16. Work Service: Acquisitions over 2008–12

Name country year stake Price (PLNmn) year EV/EBIT core business

ProService Russia 2008 100% 73.8 2008 6.7x Outsourcing

Sellpro Poland 2009 100% 7.4 2009 18.5x Supporting services

Exact Systems PL, Czech Rep. Ger, Rus 2009 76% 12.0 2009 7.9x Outsourcing

Medi Staff Poland 2010 100% 8 2009 n.a. Cleaning services

IT Kontrakt Poland 2012 75% 57.1 2011 6.8x IT outsourcing



11

This year, Work Service will begin to consolidate another three companies acquired in

2013.

Fig. 17. Work Service: Acquisitions in 2013

Name country year stake Price EV/EBIT core business

Antal Poland, Czech. Rep. 2013 100% 27.1 6.8 Personnel counselling

Work Express Poland, Belgium, France, Germany and UK 2013 80% 41.2 6.8 Cross-border temporary staffing

ProHuman Hungary 2013 75% 66.0 7.3 Temporary staffing. No. 3 in Hungary


Additionally, Work Service has recently completed a long awaited transaction with Fiege

Logistik Stiftung & Co. It set up a JV (Work Service Germany) with a German partner,

which created a notable growth opportunity in the attractive German market. In this

transaction, Work Service made a contribution in kind in the form of its German business

(c.EUR1mn of EBIT in 2013), while the German partner made a contribution in kind in

the form of its HR business (Uni/serv and Worksess). The transaction value was

EUR27mn. Work Service controls a 51% stake in Work Service Germany, while the

remaining stake belongs to Fiege Logistik Stiftung & Co. Work Service Germany, with

estimated FY14 revenues of EUR100mn, will be one of the largest HR agencies in

Germany. At the same time, through Work Service Germany, Work Service has entered

the in-house HR market of Fiege Logistik, which is one of the largest logistics companies

in Europe with an annual turnover exceeding EUR1.5bn. Business from Fiege Logistik’s

will constitute 60% of Work Service Germany’s business, while Work Service Germany

will have only 50% of Fiege Logistik’s total HR business (the remaining part is provided

by external agencies). According to the agreement, Work Service Germany has the right

to first/last offer, which favours the company vs. competitors. In our view, this deal puts

Work Service in a good position to benefit from the increasing penetration of Fiege

Logistik’s HR business.

Fig. 18. Financial results of acquisitions over 2014–17E PLN in millions, unless otherwise stated

Sales 2014E 2015E 2016E 2017E

Antal 28 35 40 37

Work Express 180 215 250 230

ProHuman 126 150 169 156

Fiege 145 349 394 363

Total 479 749 854 786

chng. % n.a. 56% 14% -8%

EBIT 2014E 2015E 2016E 2017E

Antal 3.9 4.8 5.5 5.1

margin 13.8% 13.8% 13.8% 13.8%

Work Express 7.2 8.6 10.0 9.2

margin 4.0% 4.0% 4.0% 4.0%

ProHuman 11.5 13.6 15.4 14.2

margin 9.1% 9.1% 9.1% 9.1%

Fiege 4.8 11.5 13.0 12.0

margin 3.3% 3.3% 3.3% 3.3%

Total 27.3 38.6 44.0 40.4

margin 5.7% 5.2% 5.1% 5.1%


Last but not least, close cooperation with experienced private equity fund Pine Bridge,

23% Work Service shareholder, also benefits the company and reduces the risk of

failure, in our view.


12

Organic growth will remain strong, supported by favourable underlying market trends

As well as M&A, Work Service also focuses on organic growth in order to benefit from

the anticipated fast development of temporary staffing markets in CEE countries. The

company aims to grow faster than the market by achieving higher penetration of existing

clients and gaining new ones. In our view: 1) a broad portfolio of services, which

combine temporary staffing and staff outsourcing, personnel counselling and HR

consultancy plus; 2) a flexible attitude to clients, which distinguishes the company from

competitors with rigid corporate structures, should help Work Service to outperform the

broad market. Investors should bear in mind a crucial distinguishing feature of Work

Service, which puts the company ahead of its core competitors – the fact that Work

Service operates more like an HR consultant than a regular staffing agency. Work

Service offers a comprehensive solution to the end-client, which begins with an analysis,

includes a thorough mapping of the main problems and ends with a solution. This

solution concentrates on meeting the main goal that almost every client has, namely

greater labour force efficiency. In our view, this clear competitive advantage has helped

Work Service to deliver notable organic growth year on year.

Fig. 19. Revenue growth breakdown over 2004–13

PLN in millions, unless otherwise stated

Source: Company data

Temporary staffing is a well-known tool for greatly increasing a company’s ability to

adapt to shifting demands for labour. This is extremely important during an economic

slowdown, when companies need to adapt their labour costs quickly. Surveys show that

companies with higher temporary staffing penetration usually achieve better profitably

during times of large economic fluctuations.


13

Fig. 20. Temporary staffing penetration rate over 2003–12 In %

Source: Ciett

The penetration of temporary staffing in Poland doubled over 2008–2011 as the country

experienced economic headwinds and regulatory changes that allowed for temporary

staffing during group layoffs, extended temporary staff employment from 12 month to 18

months and enabled work agencies to issue collaborative work certificates. Despite this

shift, the penetration rate is still well below that in developed markets, although the gap

is narrowing. This is also the case in other CEE markets.

Fig. 21. Temporary staffing penetration still well below developed markets… Fig. 22. … but the gap is narrowing. In % In bps

Source: Ciett, DM BZWBK Brokerage research


14

Fig. 23. Temporary staffing penetration rates vs. western markets In %

Source: Ciett, DM BZWBK Brokerage research

Last but not least, we believe that the high percentage of temporary contracts in total

labour in Poland vs. the EU average provides fuel for growth in temporary staffing

services.

Fig. 24. Temporary staffing penetration rates vs. western markets In %

Source: Eurostat, BZ WBK Brokerage research

All of the aforementioned facts bode well for the development of the temporary staffing

market. The temporary staffing market in Poland grew at an 8.3% CAGR over 2009–13

and is projected to maintain a high growth rate of CAGR 5.5% until 2016E, according to

forecasts.


15

Fig. 25. Temporary staffing market growth in Poland … Fig. 26. … and CEE* over 2019–16E PLN in millions, unless otherwise stated PLN in millions, unless otherwise stated

Source: IC Consulting data, Company data, BZWBK Brokerage research, *includes Hungary, Slovenia and Czech Rep.

Macro trends in core markets remain positive

Historically, there has been a strong positive correlation between the FTE number and

GDP growth, y/y. At a time of growing GDP (falling unemployment), the number of hours

delivered by temporary staffing usually increases, leading to a growing FTE number. As

shown in the graphs below, the price performance of temporary staffing companies is

related to leading indicators.

Fig. 27. ZEW+Ifo index vs. EU peers performance Fig. 28. ISM Man. vs. US peers performance

Source: Bloomberg, BZWBK Brokerage research

Work Service is mainly exposed to: Poland (60% of FY’14E sales), Germany (14%),

Hungary (13%), Czech Rep./Slovakia (6%) and Russia (5%). For now, GDP forecasts

remain skewed toward further growth y/y, which creates a supportive background for the

development of the temporary staffing industry.


16

Fig. 29. Consensus view on GDP growth y/y in Poland In %


Fig. 30. Consensus view on GDP growth y/y in Hungary… Fig. 31. … Germany… In % In %



17

Fig. 32. … Czech Rep., Fig. 33. and Russia.

In % In %


Investors should bear in mind that Work Service is additionally leveraged on GDP growth

due to its high exposure to these cyclical industries: Services (24% as of FY’13 sales),

Automotive (22%), Call Centre (13%) and Industrials (12%). On the other hand,

exposure to cyclical industries can be a double-edged sword during slowdowns.


18

Financial projection

We expect a notable sales CAGR of 39% for 2013–16E

We have assumed that Work Service’s revenues will continue to see notable growth,

primarily thanks to: 1) a supportive organic market, which is driven by structural changes,

and; 2) the consolidation of recently acquired companies (Antal, Work Express and

Prohuman) and the JV with Fiege Logistics (only in 2H). We have assumed that Work

Service’s top line will grow by 83%, to PLN 1.7bn, on +30% y/y growth of old business as

well as PLN479mn from consolidation. In 2015E, we expect +30% y/y sales growth, to

PLN2.2bn, on +19% y/y growth of old business and the first-full year of consolidation of

the JV with Fiege, which should add another PLN175mn. Given the cyclical character of

Work Service’s business, we have assumed a scenario in which 2016 will be the last

year of double-digit organic growth, and that revenues will fall by 5% in 2017. After that,

we expect Work Service to record a +15% rebound in 2018, and then for growth to slow

down to c.4% on average, per annum, over 2019–23E.

Fig. 34. Work Service: Revenue breakdown by segment Fig. 35. and organic business vs. M&A PLN in millions, unless otherwise stated PLN in millions, unless otherwise stated

Source: BZ WBK Brokerage research, company data Source: BZ WBK Brokerage research, company data

Margins

We expect the gross and EBITDA margins to fall by 32bps y/y, to 12.0%, and 19bps y/y,

to 5.6%, in 2014E, respectively. In nominal terms, EBITDA will grow to PLN93mn

(+76.6% y/y) in 2014E. The prime reason for this will be the consolidation of newly

acquired companies offering mainly temporary staffing, which is characterized by lower

margins. We estimate that the share of temporary staffing in the business will increase to

73% in 2014E, from 65% a year ago. We expect a similar situation in 2015, as the share

of temporary staffing increases to 74% for 2015E, from 73% a year ago. These factors,

along with expected lower margins from the outsourcing and personnel counselling

segments (27.8% vs. earlier 28.0%) should bring margins down again. We expect the

gross margin to fall by 3bps, to 11.9%, and the EBITDA margin to fall by 13bps, to 5.4%.

However, in nominal terms, EBITDA will grow to PLN118mn (+26.6% y/y) in 2015E.

Work Service’s strategic view assumes higher margins can be achieved through a

change in its sales mix toward more profitable services, such as outsourcing and

personnel counselling. The company wants to benefit from: 1) lower penetration of CEE

(Russia and Turkey included) by outsourcing and personnel counselling; 2) rising


19

presence in CEE, which offers both greater profitability and growth opportunities, as well

as; 3) cross selling opportunities in newly acquired markets. We regard this scenario as

an upside to our margin forecast, in which we employed a more conservative scenario

that assumed gradually sliding margins in both segments.

Fig. 36. Work Service: Revenue breakdown by segment Fig. 37. and organic business vs. M&A In % In %


Fig. 38. Work Service: Financial forecast for 2013–17E PLN in millions, unless otherwise stated

2013 2014E 2015E 2016E 2017E

Sales 918 1,677 2,172 2,482 2,366

chng % 26% 83% 30% 14% -5%

gross profit 113 201 259 297 282

margin, % 12.3% 12.0% 11.9% 12.0% 11.9%

chng % 50% 78% 29% 15% -5%

EBITDA 53 93 118 136 129

margin, % 5.7% 5.6% 5.4% 5.5% 5.5%

chng % 22% 77% 27% 15% -5%

EBIT 48 87 110 127 119

margin, % 5.2% 5.2% 5.1% 5.1% 5.0%

chng % 23% 81% 27% 15% -6%

net profit 27 60 73 84 77

margin, % 2.9% 3.6% 3.3% 3.4% 3.3%

chng % 30% 125% 21% 15% -8%


Cash flows and leverage

Work Service has increased its cash conversion cycle from negative 17 days in 2010 to

positive 8 days in 2013, primarily due to fast organic growth over this period. We expect

that cash conversion cycle to continue increasing in the coming years, since we do not

expect the growth of Work Service’s top line to slow significantly.

We have assumed that leverage will peak in 2014, at 1.9x in terms of net debt/EBITDA

due to the accumulated CAPEX for recent takeovers. We have conservatively assumed

that Work Service will pay PLN143mn in 2014E. Please note that, according to the

company, it will pay PLN29mn in 2014E, and PLN114mn in 2015E.


20

Fig. 39. Work Service: Cash Conversion Cycle Fig. 40. Net debt vs. EBITDA and Equity In % In %, unless otherwise stated


BZWBK vs. market consensus

Fig. 41. Work Service: BZWBK forecast vs. market consensus PLN in millions, unless otherwise stated

2014E 2015E 2016E

BZWBK mkt. cons. diff,% BZWBK mkt. cons. diff,% BZWBK mkt. cons. diff,%

Sales 1,677 1,708 -2% 2,172 2,050 6% 2,482 2,274 9%

EBITDA 93 97 -4% 118 121 -2% 136 138 -2%

EBIT 87 90 -3% 110 112 -2% 127 128 -1%

Net profit 60 56 8% 73 69 5% 84 84 0%



21

Risks

Early signs of an economic slowdown?

Many forward macro indicators have sharply turned south recently. This is also the case

in Poland, which might indicate slowing growth in the coming years. This is against the

market consensus, which expects GDP growth until 2016. In our view, investors should

be aware that expectations might be too positive, and that GDP growth may slow

instead. In our analysis, we have assumed a slowdown scenario for 2017E (FY’17 sales

and EBITDA down by 5% y/y), however, there is a risk that a slowdown might occur

earlier and that the drop might be more severe.

Fig. 42. Forward indicators dropped* Fig. 43. GPD growth likely to reverse? Fig. 44. Expectations might be too positive

In points In % In %

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Ju

n-9

5

Ju

n-9

6

Ju

n-9

7

Ju

n-9

8

Ju

n-9

9

Ju

n-0

0

Ju

n-0

1

Ju

n-0

2

Ju

n-0

3

Ju

n-0

4

Ju

n-0

5

Ju

n-0

6

Ju

n-0

7

Ju

n-0

8

Ju

n-0

9

Ju

n-1

0

Ju

n-1

1

Ju

n-1

2

Ju

n-1

3

Ju

n-1

4

Ju

n-1

5

Ju

n-1

6

GDP growth

???

Source: BZWBK Brokerage research, Bloomberg consensus

This is also the case in other markets that Work Service is exposed to. The Bloomberg

consensus is that there are early signals of a slowdown in some of these markets in

2016, namely Germany.

Fig. 45. Germany: leading indicators turn south… Fig. 46. , which might suggest GDP growth pick next year

In points In %


On the other hand, PMIs for Hungary, Czech Rep. and Russia are still positive.


22

Fig. 47. PMI for Hungary rebounded last month

In points In %


Fig. 48. Czech Rep. are set for further growth

In points In %


Fig. 49. Both the PMI and market consensus may indicate that 2014 will be the worst for Russia, although it is too early to

say, by taking into account the risk of negative impact of severe economic sanctions

In points In %



23

On the other hand, Work Service is somewhat less cyclical than a typical temporary

staffing agency because it works more like an HR consultant focused on finding and

implementing labour efficiency solutions. As evidence of this, note that Work Service

suffered a 17% decline in revenues in 2009, while profit on sales remained flat, y/y, at

PLN11mn.

Cash Flow issues and high leverage

We have stated that Work Service is notably more leveraged than its peers, mainly due

to a lower OCF/EBITDA conversion ratio, which means the company has to use debt to

finance growth. In this chapter, we present evidence that this lower OCF/EBITDA

conversion ratio has been a characteristic of US, British and EU companies in periods of

accelerating growth. The graphs below show negative correlations between sales growth

and the OCF/EBITDA conversion ratio (reversed scale), which means that the

conversion ratio decreases as growth accelerates. This has also been a feature of Work

Service in previous years. This means that faster growth resulting in higher working

capital needs is typical for the temporary staffing industry, and Work Service is no

exception. Investors should note where such relationships exist, especially when sales

growth will decrease. Prolonged periods of negative OCF will further increase leverage,

which might put the company in serious difficulties.

Fig. 50. OCF/EBITDA vs. sales growth y/y in US… Fig. 51. … in UK…


Fig. 52. OCF/EBITDA vs. sales growth y/y in EUR… Fig. 53. Work Service looks similar



24

Changes in industry regulations

Any changes to regulations for permanent or temporary staffing might adversely affect

the attractiveness of temporary work. On the other hand, there might be further

liberalization of labour laws that will be positive for Work Service.

FX exposure

Work Service’s FX exposure will increase along with rising exposure to foreign markets,

which create the risk of a negative impact if there is a sudden currency depreciation

(especially: the Euro, Czech Koruna, Rubel, Lira or Forint vs. PLN).

Acquisitions

Work Service focuses on acquisitions that are key to its growth strategy. There is a risk

that synergies will be less than expected, which will dilute value for Work Service.

Competition

Global players such as Adecco, Randstad and Manpower are present in Poland and

CEE markets, which makes the competition tough. A further increase in competition

might adversely impact the company’s revenues and margins.


25

Financial statements

Fig. 54. Work Service: Income statement forecasts PLN in millions, unless otherwise stated

2012 2013 2014E 2015E 2016E 2017E

Sales 727 918 1,677 2,172 2,482 2,366

COGS 652 806 1,476 1,913 2,185 2,084

Gross profit 75 113 201 259 297 282

OPEX 36 64 114 149 170 163

POS 39 49 87 110 127 119

other income net 0 (1) (0) - - -

EBIT 39 48 87 110 127 119

D&A 4 5 6 8 9 10

EBITDA 43 53 93 118 136 129

financial costs, net 14 16 12 15 15 15

PBT 25 32 75 95 112 104

tax 2 3 8 11 16 16

minorities 3 2 8 11 12 11

net profit 20 27 60 73 84 77

EPS 0.3 0.4 1.0 1.2 1.4 1.3

% chng -5.9% 30.3% 125.5% 21.3% 15.2% -7.6%

EPS adj. 0.3 0.4 1.0 1.2 1.4 1.3

% chng -5.9% 30.3% 125.5% 21.3% 15.2% -7.6%

margins 2012 2013 2014E 2015E 2016E 2017E

gross profit 10.4% 12.3% 12.0% 11.9% 12.0% 11.9%

SG&A/sales 5.0% 6.9% 6.8% 6.9% 6.9% 6.9%

POS 5.4% 5.4% 5.2% 5.1% 5.1% 5.0%

EBITDA 6.0% 5.7% 5.6% 5.4% 5.5% 5.5%

EBIT 5.4% 5.2% 5.2% 5.1% 5.1% 5.0%

tax 7.3% 10.2% 10.0% 12.0% 14.0% 15.0%

net 2.8% 2.9% 3.6% 3.3% 3.4% 3.3%

ROA 6.5% 6.4% 9.9% 8.8% 8.6% 7.1%

ROE 21.5% 15.7% 23.5% 22.7% 21.0% 16.1%

dynamics 2012 2013 2014E 2015E 2016E 2017E

sales 17.7% 26.2% 82.6% 29.5% 14.3% -4.7%

gross profit 41.9% 49.7% 77.9% 29.2% 14.5% -4.9%

POS 25.2% 26.4% 76.6% 26.7% 14.9% -5.6%

EBITDA 25.9% 21.9% 76.6% 26.6% 14.8% -4.8%

EBIT 25.6% 22.8% 81.0% 26.8% 14.9% -5.6%

net -5.9% 30.3% 125.5% 21.3% 15.2% -7.6%

Source: BZWBK Brokerage research, company data


26

Fig. 55. Work Service: Balance sheet forecasts PLN in millions, unless otherwise stated

2012 2013 2014E 2015E 2016E 2017E

Current assets 171 251 409 573 705 774

cash and equivalents 9 38 37 103 143 221

accounts receivable 124 176 322 417 506 498

inventories 5 7 12 16 18 17

other assets 33 30 38 38 38 38

Fixed assets 185 219 333 337 342 345

PPE 15 17 28 32 36 40

intangibles 5 29 29 29 29 29

goodwill 156 164 267 267 267 267

other assets 9 9 9 9 9 9

Total assets 355 470 742 910 1,046 1,120

Current liabilities 189 158 296 361 401 386

bank debt 69 37 77 77 77 77

accounts payable 119 119 218 282 322 307

finance lease - - - - - -

other current liabilities 2 2 2 2 2 2

Long-term liabilities 44 77 142 162 162 162

bank debt 38 74 139 159 159 159

finance lease - - - - - -

other long-term liabilities 6 3 3 3 3 3

Equity 113 224 284 357 440 517

common stock 5 6 6 6 6 6

other capital 88 192 218 278 351 434

net profit 20 27 60 73 84 77

Minority Interest 10 11 19 30 42 54

Negative goodwill - - - - - -

Total liabilities and equity 355 470 742 910 1,046 1,120

Debt 112 114 219 239 239 239

Net debt 104 76 182 136 96 18

Net debtEquity 92% 34% 64% 38% 22% 4%

Net debt/EBITDA 2.4 1.4 1.9 1.2 0.7 0.1


Fig. 56. Work Service: Cash flow statement forecasts

PLN in millions, unless otherwise stated

2012 2013 2014E 2015E 2016E 2017E

Cash flow from operations -5 -19 6 46 42 80

Net profit 20 27 60 73 84 77

Depreciation and amortization 4 5 6 8 9 10

Provisions 0 0 0 0 0 0

Changes in WC, o/w -10 -54 -52 -34 -51 -7

inventories -4 -1 -6 -4 -2 1

receivables 0 -52 -145 -95 -89 7

payables -6 0 99 64 40 -15

Other, net -20 3 -8 0 0 0

Cash flow from investment -58 -42 -120 -12 -14 -13

Additions to PPE and intangibles -13 -31 -17 -12 -14 -13

Change in long-term investments -4 0 0 0 0 0

Other, net -40 -11 -103 0 0 0

Cash flow from financing 66 91 113 31 12 11

Change in long-term borrowing 10 36 65 20 0 0

Change in short-term borrowing 34 -32 40 0 0 0

Change in equity and profit distribution 16 85 0 0 0 0

Dividends paid 0 0 0 0 0 0

Other, net 7 2 8 11 12 11

Net change in cash and equivalents 3 29 -1 65 40 78


WORK SERVICE 6 August 2014

27

Dom Maklerski BZ WBK SA 5A Grzybowska St.

00-132 Warsaw fax. (+48) 22 586 81 09

Equity Research Department Pawel Puchalski, CFA, Head tel. (+48) 22 586 80 95 [email protected] Telecommunications, Metals & Mining, Power

Dariusz Gorski, Deputy Head tel. (+48) 22 586 81 00 [email protected] Strategy, Banks, Media

Tomasz Kasowicz tel. (+48) 22 586 81 55 [email protected] Oil&Gas, Chemicals

Tomasz Sokolowski tel. (+48) 22 586 82 36 [email protected] Pharma, Retail

Adrian Kyrcz tel. (+48) 22 586 81 59 [email protected] Construction, Real Estate

Lukasz Kosiarski tel. (+48) 22 586 82 25 [email protected] Media, IT, IT distribution, Video Games, Health Care

Andrzej Bieniek, tel. (+48) 22 586 85 21 [email protected] Securities Broker, Investment Advisor Financials

Tomasz Kucinski tel. (+48) 22 534 16 10 [email protected] Research Associate

Michal Sopiel tel. (+48) 22 586 82 33 [email protected] Research Associate, Quantitative Analysis

Sales & Trading Department

Piotr Zagan, Head tel. (+48) 22 586 80 84 [email protected] Wojciech Wosko, Securities Broker tel. (+48) 22 586 80 82 [email protected] Kamil Cislo, Securities Broker tel. (+48) 22 586 80 90 [email protected] Grzegorz Kolodziejczyk, Securities Broker tel. (+48) 22 586 81 93 [email protected] Blazej Leskow, Securities Broker tel. (+48) 22 586 80 83 [email protected] Marcin Kuciapski, Securities Broker tel. (+48) 22 586 80 96 [email protected]

Marek Wardzynski, Securities Broker tel. (+48) 22 586 80 96 [email protected]

Alex Kaminski tel. (+48) 22 586 80 63 [email protected]

LIMITATION OF LIABILITY

This material was produced by BZ WBK Brokerage S.A. (BZ WBK Brokerage), entity that is subject to the regulations of the Act on Trading

in Financial Instruments dated July 29th 2005 (Journal of Laws of 2010, No.211 item 1384 - consolidated text, further amended), Act on

Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies dated July

29th 2005 (Journal of Laws of 2009, No.185 item 1439 - consolidated text, further amended), Act on Capital Market Supervision dated July

29th 2005 (Journal of Laws of 2005, No.183 item 1537 further amended). It is addressed to qualified investors and professional clients as

defined under the above indicated regulations and to Clients of BZ WBK Brokerage entitled to gain recommendations based on the

brokerage services agreements.

All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of BZ WBK Brokerage or entities belonging to BZ WBK.

BZ WBK Brokerage is an author of this document. All copyrights belong to BZ WBK Brokerage. This document may not be reproduced or

published, in part or in whole, without a prior written consent of BZ WBK Brokerage.


28

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advice, or a representation that any investment or strategy is suitable or appropriate to investor’s individual circumstances, or otherwise

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http://www.dmbzwbk.pl/


29

Brokerage. Furthermore, depending on the situation, such information can be grounds for taking different (including opposing) investment action in the case of particular investors. Any change in weight of stocks already included in the portfolio should not be construed as investment recommendation. Such changes are aimed exclusively at making the total weight of all stocks equal 100%. Persons involved in selecting stocks to compose the mid-caps portfolio can sell such stocks on the WSE if a given stock is included in the list for longer than one month.

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considered within purely technical context and should not be considered as changes to recommendations in the meaning of the law.

Explanations of special terminology used in the recommendation:

EBIT – earnings before interest and tax

EBITDA – earnings before interest, taxes, depreciation, and amortization

P/E – price-earnings ratio

EV – enterprise value (market capitalisation plus net debt)

PEG - P/E to growth ratio

EPS - earnings per share

CPI – consumer price index

WACC - weighted average cost of capital

CAGR – cumulative average annual growth

P/CE – price to cash earnings (net profit plus depreciation and amortisation) ratio

NOPAT – net operational profit after taxation

FCF - free cash flows

BV – book value

ROE – return on equity

P/BV – price-book value

Recommendation definitions:

Buy - indicates a stock's total return to exceed more than 15% over the next twelve months.

Hold - indicates a stock's total return to be in range of 0%-15% over the next twelve months.

Sell - indicates a stock's total return to be less than 0% over the next twelve months.

In the opinion of BZ WBK Brokerage, this document has been prepared with all due diligence and excludes any conflict of interests which

could influence its content. BZ WBK Brokerage is not obliged to take any actions which could cause financial instruments that are the

subject of the valuation contained in this document to be valued by the market in accordance with the valuation contained in this document.

BZ WBK Brokerage is subject to the supervision of the Financial Supervision Commission and this document has been prepared within the

legal scope of the activity of BZ WBK Brokerage.

The date on the first page of this report is the date of preparation and publication of the document.

Any person who accepts this document agrees to be bound by the foregoing disclaimer and limitations.

BZ WBK Brokerage with its registered office in Poznan, Pl. Wolnosci 15, 60 - 967 Poznan, registered by the District Court in Poznan –

Nowe Miasto i Wilda, Division VIII Commercial of the National Court Register under the number KRS 0000006408, Taxpayer Identification

No. 778-13-59-968, with share capital amounting to PLN 44 973 500 fully paid up .

---------------------------------------------------------------------------------------------------------------------------------------- DISCLOSURES This report contains recommendations referring to company/companies: Work Service S.A. („Issuer”). BZ WBK Brokerage emphasizes that this document is going to be updated at least once a year. This document has not been disclosed to Issuer.

In preparing this document BZ WBK Brokerage applied at least two of the following valuation methods:

1) discounted cash flows (DCF),

2) comparative,

3) mid-cycle,

4) dividend discount model (DDM),

5) residual income,

6) warranted equity method (WEV),

7) SOTP valuation,

8) liquidation value.

The discounted cash flows (DCF) valuation method is based on expected future discounted cash flows. One advantage of the DCF

valuation method is that it takes into account all cash streams reaching Issuer and the cost of money over time. Some disadvantages of


30

the DCF valuation method are that a large number of parameters and assumptions need to be estimated; and the valuation is sensitive to

changes in those parameters.

The comparative valuation method is based on the economic rule of "one price". Some advantages of the comparative valuation method

are that the analyst need only estimate a small number of parameters; the valuation is based on current market conditions; the relatively

large accessibility of indicators for companies being compared; and that there is an extensive knowledge of the comparative method

among investors. Some disadvantages of valuation by the comparative method are the considerable sensitivity of the results of the

valuation on the choice of companies to the comparative group; the method can lead to a simplification of the picture of the company which

in turn can lead to omitting certain important factors (e.g. growth dynamics, extra-operational assets, corporate governance, the

repeatability of results, differences in applied accounting standards); and the uncertainty of the effectiveness of a market valuation of

companies being compared.

The mid-cycle valuation is based on long-term averages for the two-year forward consensus P/E and EV/EBITDA multiples for the members of the peer group. The methodology is aimed calculating a fair, through the cycle value of cyclical stocks. Among its shortfalls is that at peaks and/or troughs of the cycle, the implied fair value may deviate substantially from the market’s value of an analysed stock as well as the methods’ reliance on the quality of external data (we use Bloomberg consensus here). Simplicity and average through-cycle value allowing to capture over as well as under-valuation of a given stock are the main advantages of this methodology. The dividend discount model (DDM) valuation is based on the net present value of the future dividends that are expected to be paid out by the company. Some advantages of the DDM valuation method are that it takes into account real cash flows to equity-owners and that the methodology is used in respect to companies with long dividend payout history. Main disadvantage of the DDM valuation method is that dividend payouts are based on a large number of parameters and assumptions, including dividend payout ratio.

Residual income method is conceptually close to the discounted cash flows method (DCF) for non-financial stocks, the difference being

that it is based on expected residual income (returns over COE) rather than expected future cash flows. One advantage of this valuation

method is that it captures the excess of profit potentially available to shareholders and the cost of money over time. Main disadvantage of

the valuation method is that a large number of parameters and assumptions need to be estimated; and the valuation is sensitive to

changes in those parameters.

The warranted equity method (WEV) is based on the formula P/BV = (two year forward ROE less sustainable growth rate)/ (Cost of

equity less sustainable growth rate) which allows estimating a fair value (FV) of a given stock in two years time. Subsequently the FV is

discounted back to today. The main advantage of the WEV method is that it is a transparent one and based on relatively short term

forecasts, hence substantially reducing the margin of forecasting error. The main disadvantage in our view is that the model is based on

the principle that stock price should converge towards its fair value implied by company’s ROE and COE.

SOTP valuation - different assets of a company are being valued according to different valuation methods, and the sum of these

valuations represents the final valuation of the company. SOTP valuation advantages / disadvantages are identical to advantages and

disadvantages of the specific valuation methods used.

Liquidation value method – liquidation value is the estimated amount of money that an asset or company could be quickly sold for, such

as if it were to go out of business. Then, the estimated assets value is adjusted for liabilities and liquidation expenses. One advantage of

this valuation method is its simplicity. This method does not account for intangible assets as goodwill, which is the main disadvantage.

Over the last three months BZ WBK Brokerage issued 40 Buy recommendations, 11 Hold recommendations and 13 Sell recommendations.

% of Companies

Rating Covered with This Rating Provided with Investment Banking in Past 12M

Buy 52,54 12,90

Hold 16,95 30,00

Sell 20,34 8,33

Under Review 10,17 33,33

Definition of each rating was provided in the above section Limitation of liability.

The Stock performance charts in this report include line graphs of the securities’ daily closing prices for one year period. Information relating to a longer period (max 3 years) is available upon request.

The Issuer does not hold shares of BZ WBK Brokerage.

Neither members of the Issuer’s authorities nor their relatives are members of the management board or supervisory board of BZ WBK

Brokerage.

No person engaged in preparing the report or his/her relative is the member of the Issuer’s authorities and holds management position in

this entity, and none of those persons or their relatives are parties to any agreement with the Issuer, which would be concluded on different

basis than agreements between Issuer and consumers.

Person engaged in preparing the report did not acquire shares of the Issuer before its public offering.


31

Among those, who prepared this document, as well as among those who didn’t prepare it but had or might have had the access to it, there are no such individuals who hold shares of the Issuer or financial instruments whose value is connected with the value of the financial instruments issued by the Issuer. BZ WBK Group, its affiliates, representatives or employees may occasionally undertake transactions or may be interested in acquiring securities of companies directly or indirectly related to those being analysed During the last 12 months BZ WBK Brokerage has not been a party to agreements relating to the offering of financial instruments issued by Issuer and connected with the price of financial instruments issued by Issuer. During the last 12 months BZ WBK Brokerage was not a member of syndicate for financial instruments issued by Issuer.

BZ WBK Brokerage did not buy or sell any financial instruments issued by the Issuer on its own account, in order to realize investment

subissue or service agreements.

BZ WBK Brokerage does not act as market maker, on principles specified in the Regulations of the Warsaw Stock Exchange, for the shares of Issuer. BZ WBK Brokerage acts as issuer’s market maker, on principles specified in the Regulations of the Warsaw Stock Exchange, for the shares of Issuer. BZ WBK Brokerage does not buy or sell any financial instruments of the Issuer on its own account in order to perform other tasks related to the organization of the regulated market. Both BZ WBK and BZ WBK Brokerage which are associated are not parties to the agreement with the Issuer related to issuing recommendations. During the last 12 months BZ WBK Brokerage has received remuneration for providing services for the Issuer. These services covered acting as issuer’s market maker. BZ WBK Brokerage does not hold shares of the Issuer or any financial instruments of the Issuer being the subject of this document, in the amount reaching at least 5% of the share capital. BZ WBK, which is connected with BZ WBK Brokerage, is not directly or indirectly connected with the Issuer.

BZ WBK Brokerage does not rule out that in the period of preparing this document any Affiliate of BZ WBK Brokerage might purchase

shares of the Issuer or any financial instruments being the subject of this document which may cause reaching at least 5% of the share

capital.

BZ WBK Group has not hold, in the period of preparing this document, shares of the Issuer, in the amount reaching at least 1% of the

share capital.

Subject to the above, the Issuer is not bound by any contractual relationship with BZ WBK Brokerage, which might influence the objectivity

of the recommendations contained in this document.

BZ WBK Brokerage may hold directly or indirectly, financial instruments issued by the Issuer or financial instruments whose value depends

on the value of financial instruments issued by the Issuer (except on the basis of being issuer’s market maker). However, it cannot be ruled

out that, in the period of the next twelve months or the period in which this document is in force, BZ WBK Brokerage will submit an offer to

provide services for the Issuer or will purchase or dispose of financial instruments issued by the Issuer or whose value depends on the

value of financial instruments issued by the Issuer. Except for broker agreements with clients under which BZ WBK Brokerage sells and

buys the shares of the Issuer at the order of its clients, BZ WBK Brokerage is not party to any agreement which would depend on the

valuation of the financial instruments discussed in this document.

Remuneration received by the persons who prepare this document may be dependent, in an indirect way, from financial results gained

from investment banking transactions, related to financial instruments issued by the Issuer, made by BZ WBK Brokerage or its Affiliates.

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