Glimmers of light emerge

10-June-2009 | By Kean Marden, support services equity analyst, head of research, Singer Capital Markets

The key themes that have driven staffing share prices higher this year remained intact over the past fortnight. Although the trading environment remains tough, glimmers of light are emerging in a few corners of the labour market and forward looking indicators of economic activity continue to positively surprise. Takeover activity traditionally picks up as confidence returns to equity markets and recent developments in the staffing sector suggest that the industry is in for an interesting 12 months.

When assessing the likely strength of future trading, we focus on the segments of the labour market which are ‘early cycle’ (ie those which enter recovery or drift into downturn first). Historically, the genesis of a global labour market recovery has been observed in US manufacturing, which conceptually makes sense as the US economy always recovers first, recovery is normally driven by exports and manufacturers export far more than the service sector. The City looks at the ‘Institute for Supply Management manufacturing new orders index’ as a key indicator of the future health of US manufacturing and encouragingly this has rocketed over the past few months to its highest level since November 2007.

Moving on to acquisition activity, another staffing agency looks likely to leave the stock market in 2009 following the announcement by OPD that its chairman and members of the executive management team were in discussions with the board regarding a cash offer of 57p. This was a 44% premium to the previous night’s share price but substantially below the 500p level at which they traded in early 2007. If the transaction is completed, OPD will consider the potential disposal of a majority stake in Odgers to its management team on terms to be agreed at that time.

Elsewhere, while we all wait anxiously to see what Adecco will do with its e1bn (£0.87bn) war chest the group seems in no hurry to part with its cash. In a recent press interview, the finance director noted that he is “not under any pressure to buy”. In our view, developments are unlikely until the new chief executive, Patrick de Maeseneire, who joined the group on 1 June, settles into his role.

June is a relatively quiet month for staffing news flow but the pace picks up in July with Michael Page, Hays, SThree and the European agencies all reporting. Unfortunately, despite aggressive cost reductions over the past 12 months, the brutal decline in net fees so far this year will have decimated profitability.