i-exchange expects a wave of consolidation across the Employment Service sector as providers with low cash cover struggle with the economic fallout of the COVID-19 pandemic.
The CEOs of many large-scale organisations within the sector – and those in adjacent sectors – have already signaled clear intent to consolidate.
This activity is likely to be clustered in the Disability Employment Sector (DES) first, due to the higher density of providers. Many DES providers have noticeably poor star rating performance or – even worse – no rating at all, indicating that caseloads remain low. These providers will face increased cashflow pressures due to a poor pipeline of anchors and outcomes.
providers with high fixed cost bases will be acutely exposed
Providers with high fixed cost bases will be acutely exposed to the sudden drop in outcome fee revenue, and the planned withdrawal of the JobKeeper payment (already flagged for review before September) will accelerate the need to make decisions.
Boards and Executives should carefully note cash cover levels and dwindling equity positions, especially providers heavily reliant on prepaid service fees as the only source of income.
Our clients often ask what capacity they have to borrow against contracts with no volume guarantee. The reality is often little, or none. As financial year-end approaches, fiscal positions and forecasting sensitivities will be revealing.
the window for action is narrowing and the risks are increasing
Several options remain viable, but the window for action is narrowing and the risks are increasing. When it comes to potential buyouts, novations and mergers, the timing and speed of the COVID-19 recovery will affect price tags. It’s important that organisations consider all the options before any major decision.
Considering that DES contract novations can take anywhere from 3 to 6 months, providers looking to explore opportunities should act quickly.
Many providers have taken advantage of available opportunities in the market by talking to i-exchange.
Contact i-exchange today for a confidential discussion.
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