City Comment

20-January-2010

In our final column of 2009 we noted that the world had changed for the better. The recurring theme which emerged from our discussions with quoted and unquoted staffing agencies as the year closed out was that trading momentum had picked up markedly and, after two years of headcount reduction, many were recruiting once again.

Our optimism was reinforced in early January when two of the sector’s heavyweights updated on Q4 trading. Hays’ net fee income was slightly ahead of our forecast and the trading statement contained numerous reassuring themes. Sequential revenue decline has ceased in all three divisions, net debt was lower than expected, temp gross margins have stabilised, the public sector appears to be experiencing gradual decline rather than collapse and we believe consultant headcount will rise by around 5% over the next six months.

True to form, Michael Page were even more upbeat. Net fees exceeded the most bullish of forecasts but the main surprise was the degree of profit recovery with operating profit virtually doubling compared to Q3. Geographical trends mirrored those revealed by Hays a day earlier - UK recovery is understandably anaemic, momentum is building rapidly in Asia Pacific and the European revival is currently about three months ahead of expectations.

In reaction, negative analysts have spent the past few weeks falling over themselves to reverse unsuccessful sell recommendations and upgrade overly pessimistic profit forecasts.

For example, the number of stockbrokers with a sell on Michael Page shares has halved since November and one analyst recently upgraded his 2010 earnings estimate by 750%!

Nevertheless, the tone of language used by management teams remains understandably cautious as there is still a great deal of uncertainty regarding the shape of recovery. Temp agencies in particular will want to observe January’s return to work figures as the first tangible indicator of trading momentum in 2010.

In response, staffing share prices surged ahead during December and early January with Robert Walters and SThree posting 20-25% increases following their respective year end trading statements. Although we entered 2009 pessimistically, equity markets started to anticipate economic recovery during the spring and most of the major UK staffing agencies are now trading at two year highs. However, now that investors’ expectation levels have become elevated, consistent earnings upgrades will be required during 2010 to justify current share prices.

Kean Marden is support services equity analyst at ABN AMRO Bank

ABN AMRO Bank NV is an authorised agent of The RBS plc