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Tough month for equity markets - City comment

Thu, 26 Jun 2014 | By Kean Marden, head of business services equity research, Jefferies International
June has been a tougher month for equity markets with investor sentiment impacted by geo-political events in Ukraine and Iraq. The FTSE100 index briefly flirted with 10-year highs but weak trading volumes seem indicative of a lack of conviction among shareholders.

Against this backdrop the FTSE100 index has drifted by 2% over the past fortnight, with Michael Page and the Dutch trio of Randstad, USG and Brunel all falling by 6-7%. The leader board doesn’t exactly set the pulse racing as the best that Robert Half, Empresaria and Matchtech could achieve was a flat performance.

In our view, this is understandable. Last month we published an in-depth research note in which we turned more cautious on the outlook for recruiter share prices.
While we remain positive on the medium-term outlook for profitability we are conscious that recruiter shares anticipate trading momentum as far as one to two years into the future. An awful lot has gone well over the last 12 months and it is becoming increasingly difficult to identify an obvious area where investors’ expectations could be positively surprised.

From a share price perspective, stockbrokers’ recommendations have become progressively more upbeat and the shares of many companies now trade close to all-time relative highs. This is not normally an encouraging sign for a sector that has rewarded the contrarian investor.

SThree provided only the main update of note this month as it hosted an investor seminar at which management updated group strategy and, in contrast to a similar event in March 2010, spelled out specific financial targets for 2018. In our view, the low-case scenario is far too pessimistic and we believe the market will dwell on the medium (£73m profit) and high-case (£107m) instead.

SThree has traditionally shunned mergers & acquisitions (M&As) so we were surprised by a switch in tone from management who are ‘actively engaged’ in looking at bolt-on opportunities that would ‘expedite access’ to new geographies and sectors.

In general we are nervous of M&As in the recruitment sector and only make an exception for Hays, as their four bolt-ons over the last decade have demonstrably created shareholder value. By 2018, SThree’s balance sheet could have £50-100m surplus cash, which we would prefer to be returned to shareholders. After all, if the organic growth story is so strong, why risk distracting management?
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