city comment

07 July 2010

Against this nervous backdrop, the reaction of recruiters’ share prices has varied considerably from a 15% gain for Empresaria to 15-20% declines for Healthcare Locums (albeit aided by the cessation of takeover discussions in mid June) and SThree.

From our perspective, the UK budget could have been considerably more painful for the recruitment sector. The key positive was a reduction in
corporation tax from 28% to 24% in 2013/14 as offsetting changes to the capital allowance regime have little impact on labour intensive industries. In addition, the two year public sector pay freeze (double original expectations of one year) will hopefully reduce the likely scale of public sector job cuts. However, even after adjusting for this, the Office of Budget Responsibility forecasts a 600,000 headcount reduction over the next five years.

Against this nervous backdrop, the reaction of recruiters’ share prices has varied considerably from a 15% gain for Empresaria to 15-20% declines for Healthcare Locums (albeit aided by the cessation of takeover discussions in mid June) and SThree

Trading updates across the sector were upbeat in June. Harvey Nash and Hydrogen both cited a strong recovery in perm fees in recent months. Staffline flagged that profits would be “significantly ahead of current expectations” driven by a pick up in temp demand which had continued into June. Net fees and profitability at Empresaria are materially ahead of last year with the UK, Germany and Asia all ahead of expectations. We expect Hays, Michael Page and Robert Walters to communicate a similarly positive tone when they update investors in early July.

Elsewhere, SThree’s second quarter results were a little more mixed. Net fee growth was held back by the non-renewal of UK public sector temp contracts after the 2009/2010 fiscal year end but momentum in the perm business was encouraging.

Despite the economic uncertainty, some companies have sufficient confidence to acquire their competitors and several takeovers have spiced up the wider equity market this summer. Intriguingly, the Financial Times reported recently that the chief executive of Korn/Ferry would be relocating to London for three months “make a series of acquisitions that will seal its expansion in Europe”. The article cited a £300m war chest.

Kean Marden is head of support services equity research, RBS Global Banking & Markets, The Royal Bank of Scotland