Matchtech, Staffline and Empresaria top in 2013 - City Comment
19 December 2013
This year has been good for investors in the staffing stocks, with share prices increasing 41.3% in terms of simple average over the past 12 months.
Thu, 19 Dec 2013 | By Adrian Kearsey, equity analyst at Hardman & CoThis year has been good for investors in the staffing stocks, with share prices increasing 41.3% in terms of simple average over the past 12 months.
This compares with 20.6% for the wider support services sector and 11.9% for the market. Three of the biggest winners have been Matchtech (+145% over the past 12 months), Staffline (+85.8%) and Empresaria (+85.2%).
Out of the 15 UK quoted staffing stocks we look at, only four under-performed the market over the period: Impellam, Nakama, Norman Broadbent and SThree.
The outperformance has been driven by a move into cyclical stocks, with investors excited about the prospects for economic growth. Indeed, as we move ever closer to Christmas, the news flow on the job market seems to get stronger and stronger. In the UK, unemployment has fallen to its lowest level in four and a half years.
According to the Office for National Statistics, the jobless rate fell to 7.4% in October, down from 7.6% a month earlier. Over the last three months, there were 99,000 fewer people unemployed, the biggest drop since June-August 2000. In addition, the number of people in work jumped by 250,000, the biggest increase since May-July 2010.
In the US, jobs data has also been on the upside, surprising many. Department of Labor data showed US employers added 203,000 workers in November. This was materially higher than the 185,000 expected by economists in a Bloomberg survey and represented the fourth month in a row when jobs data surprised on the upside.
Crucially, with other key economic data pointing in the right direction we expect this momentum to carry into 2014. For example, this week’s US manufacturing PMI survey showed output trends are strong and close to Novembers 20-month peak. New orders and manufacturing backlogs should ensure the pace is maintained. The position is similarly positive for US and UK service sectors.
Given this improving outlook the staffing stocks have enjoyed a considerable re-rating. The most pronounced has been Matchtech. Therefore, while earnings growth has been healthy (last year’s pre-tax profits increased 29%), the massive jump in the Matchtech share price reflects a 120% gain in the price earnings ratio (PER).
This time last year the 12-month prospective PER was 7.1x; today it is 15.7x. This level of re-rating is unlikely to be repeated in 2014 and so share price gains are likely to slow. That said, its prospective PER is still materially lower than Michael Page/PageGroup, which is trading on 23.9x and so it is possible to argue there remains value in the story.
The improved macro-environment will prompt central bankers to reduce their quantitative easing (QE) programmes and at some point start to raise interest rates. Indeed this week the US Federal Bank announced it plans to cut its monthly QE purchases from $85bn (£52bn) of assets to $75bn. This inevitable tightening in monetary policy will undoubtedly put the brakes on equity markets. This reinforces our view that most share price appreciation will have to be driven by earnings growth and not valuation gains in 2014.
That said, there still remains value in the sector. As we have discussed before, not all staffers trade on lofty multiples. Harvey Nash is trading on a respectable PER of 11.1x and Hydrogen on a PER of 10.1x. Even better value can be found with smaller names. For example, Empresaria is trading on a PER of 5.9x. Interestingly, on the 10 December the company announced the chairman had purchased 3.2m shares at 36p, taking his holding from 22% to 29%.
Often, it pays to follow management when they buy shares in the market.
This compares with 20.6% for the wider support services sector and 11.9% for the market. Three of the biggest winners have been Matchtech (+145% over the past 12 months), Staffline (+85.8%) and Empresaria (+85.2%).
Out of the 15 UK quoted staffing stocks we look at, only four under-performed the market over the period: Impellam, Nakama, Norman Broadbent and SThree.
The outperformance has been driven by a move into cyclical stocks, with investors excited about the prospects for economic growth. Indeed, as we move ever closer to Christmas, the news flow on the job market seems to get stronger and stronger. In the UK, unemployment has fallen to its lowest level in four and a half years.
According to the Office for National Statistics, the jobless rate fell to 7.4% in October, down from 7.6% a month earlier. Over the last three months, there were 99,000 fewer people unemployed, the biggest drop since June-August 2000. In addition, the number of people in work jumped by 250,000, the biggest increase since May-July 2010.
In the US, jobs data has also been on the upside, surprising many. Department of Labor data showed US employers added 203,000 workers in November. This was materially higher than the 185,000 expected by economists in a Bloomberg survey and represented the fourth month in a row when jobs data surprised on the upside.
Crucially, with other key economic data pointing in the right direction we expect this momentum to carry into 2014. For example, this week’s US manufacturing PMI survey showed output trends are strong and close to Novembers 20-month peak. New orders and manufacturing backlogs should ensure the pace is maintained. The position is similarly positive for US and UK service sectors.
Given this improving outlook the staffing stocks have enjoyed a considerable re-rating. The most pronounced has been Matchtech. Therefore, while earnings growth has been healthy (last year’s pre-tax profits increased 29%), the massive jump in the Matchtech share price reflects a 120% gain in the price earnings ratio (PER).
This time last year the 12-month prospective PER was 7.1x; today it is 15.7x. This level of re-rating is unlikely to be repeated in 2014 and so share price gains are likely to slow. That said, its prospective PER is still materially lower than Michael Page/PageGroup, which is trading on 23.9x and so it is possible to argue there remains value in the story.
The improved macro-environment will prompt central bankers to reduce their quantitative easing (QE) programmes and at some point start to raise interest rates. Indeed this week the US Federal Bank announced it plans to cut its monthly QE purchases from $85bn (£52bn) of assets to $75bn. This inevitable tightening in monetary policy will undoubtedly put the brakes on equity markets. This reinforces our view that most share price appreciation will have to be driven by earnings growth and not valuation gains in 2014.
That said, there still remains value in the sector. As we have discussed before, not all staffers trade on lofty multiples. Harvey Nash is trading on a respectable PER of 11.1x and Hydrogen on a PER of 10.1x. Even better value can be found with smaller names. For example, Empresaria is trading on a PER of 5.9x. Interestingly, on the 10 December the company announced the chairman had purchased 3.2m shares at 36p, taking his holding from 22% to 29%.
Often, it pays to follow management when they buy shares in the market.
