Staffing stocks show wide range of performance – City Comment
20 June 2014
Would you believe that we are almost half-way through 2014? While geopolitical situations in the Iraq and Ukraine are a cause for concern, the world generally feels a much better place today that it did even at the end of 2013.
Fri, 20 Jun 2014 | By Adrian Kearsey, head of smaller companies research at Sanlam Securities UKAn improving macroeconomic outlook is making investors increasingly excited about the prospects for the recruitment sector. However, in assessing the potential share price for staffing stocks, they need to consider factors specific to the companies concerned.
Would you believe that we are almost half-way through 2014? While geopolitical situations in the Iraq and Ukraine are a cause for concern, the world generally feels a much better place today that it did even at the end of 2013.
Across most countries, labour markets are improving. For example, in the UK the unemployment rate has fallen from 7.2% (Jan 2014) to 6.6% (May 2014) and, according to ONS data, pay rates are moving to almost 1% higher in real terms – being squeezed by a tight supply of skills.
Manpower Employment Outlook Surveys indicate that this positive trend will continue. The most recent report, released earlier this month, signalled that over the coming months “staffing levels are expected to increase in 37 of the 42 countries [surveyed]”. Within the mix, Japan, the US, the UK and Germany all expected to deliver healthy labour growth. France and Benelux remain in negative territory.
Given the improving macro outlook, investors have been increasingly excited about the cyclical prospects for the sector. Share prices have performed well and valuations have moved materially higher. For example, over the past 24 months the Matchtech forward price earnings ratio (PER) has increased from 6x to 15x, driven by strong earnings growth. During that period, shareholders have almost tripled their money.
Since we are mid-way through the year, it is a good time to reflect on the recent performance of stocks. Interestingly, over the past six months there have been considerable variations in the share prices of the staffing stocks. The best performers include Nakama and Servoca, whose shares have each jumped by more than 90%, and Staffline, whose shares have jumped by more than 60%. By contrast, several of the staffers have seen their shares retreat since the beginning of the year. For example, Page Group – formerly Michael Page – has seen its shares slide 7% and Robert Walters 4%. It is, therefore, clearly important to look at stock-specific factors when assessing the near-term upside potential of stocks.
Staffline provides a text-book example of how corporate mergers and acquisitions can drive interest in a stock. The Avanta acquisition was both earnings-accretive and strategically important, and the shares have increased 17% since the deal was announced. However, the majority of the share price appreciation this year has been driven by healthy earnings growth. In January, the company announced that operating profits in the financial year 2013 were up 16.1%. As a consequence, the forward PER has increased from 9x to 15x. While this re-rating is unlikely to be repeated, the company is well placed to deliver further profit growth, and a successful re-signing of the welfare-to-work contracts post-election should provide further scope for upward movement in sentiment.
Hays, which has seen its shares increase 23%, has outperformed its rival Page for three reasons. Firstly, it has delivered a positive earnings surprise, announcing in May that full-year results were to be towards the top of end of market estimations. By contrast, Page has broadly been trading in line with estimates. Secondly, net fee income growth at Hays has been trending higher and even the picture in Australia has stabilised – an important catalyst). Finally, Hays started the year trading on a 35% valuation discount to Page. This discount has narrowed to 14%, in terms of forward PER.
Therefore, the past six months demonstrate that, while investors are looking to ride the staffing cycle, it is important to look at stock-specific factors when assessing relatively short-term share price potential.
Would you believe that we are almost half-way through 2014? While geopolitical situations in the Iraq and Ukraine are a cause for concern, the world generally feels a much better place today that it did even at the end of 2013.
Across most countries, labour markets are improving. For example, in the UK the unemployment rate has fallen from 7.2% (Jan 2014) to 6.6% (May 2014) and, according to ONS data, pay rates are moving to almost 1% higher in real terms – being squeezed by a tight supply of skills.
Manpower Employment Outlook Surveys indicate that this positive trend will continue. The most recent report, released earlier this month, signalled that over the coming months “staffing levels are expected to increase in 37 of the 42 countries [surveyed]”. Within the mix, Japan, the US, the UK and Germany all expected to deliver healthy labour growth. France and Benelux remain in negative territory.
Given the improving macro outlook, investors have been increasingly excited about the cyclical prospects for the sector. Share prices have performed well and valuations have moved materially higher. For example, over the past 24 months the Matchtech forward price earnings ratio (PER) has increased from 6x to 15x, driven by strong earnings growth. During that period, shareholders have almost tripled their money.
Since we are mid-way through the year, it is a good time to reflect on the recent performance of stocks. Interestingly, over the past six months there have been considerable variations in the share prices of the staffing stocks. The best performers include Nakama and Servoca, whose shares have each jumped by more than 90%, and Staffline, whose shares have jumped by more than 60%. By contrast, several of the staffers have seen their shares retreat since the beginning of the year. For example, Page Group – formerly Michael Page – has seen its shares slide 7% and Robert Walters 4%. It is, therefore, clearly important to look at stock-specific factors when assessing the near-term upside potential of stocks.
Staffline provides a text-book example of how corporate mergers and acquisitions can drive interest in a stock. The Avanta acquisition was both earnings-accretive and strategically important, and the shares have increased 17% since the deal was announced. However, the majority of the share price appreciation this year has been driven by healthy earnings growth. In January, the company announced that operating profits in the financial year 2013 were up 16.1%. As a consequence, the forward PER has increased from 9x to 15x. While this re-rating is unlikely to be repeated, the company is well placed to deliver further profit growth, and a successful re-signing of the welfare-to-work contracts post-election should provide further scope for upward movement in sentiment.
Hays, which has seen its shares increase 23%, has outperformed its rival Page for three reasons. Firstly, it has delivered a positive earnings surprise, announcing in May that full-year results were to be towards the top of end of market estimations. By contrast, Page has broadly been trading in line with estimates. Secondly, net fee income growth at Hays has been trending higher and even the picture in Australia has stabilised – an important catalyst). Finally, Hays started the year trading on a 35% valuation discount to Page. This discount has narrowed to 14%, in terms of forward PER.
Therefore, the past six months demonstrate that, while investors are looking to ride the staffing cycle, it is important to look at stock-specific factors when assessing relatively short-term share price potential.
