Surprises in the sector

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

What an action packed fortnight for the staffing sector — takeover speculation, shock management changes, profit warnings and soaring share prices.

There have been interesting developments since Recruiter broke the story that Adecco was rumoured to be considering the acquisition of SThree, most notably the surprise replacement of Dieter Scheiff (Adecco’s chief executive) last week. Our initial reaction was to assume that the likelihood of a deal had diminished as the new CEO doesn’t start until 1 June and he will need a few months to familiarise himself with the business. However, some Adecco shareholders have expressed a different view and there is a school of thought that Scheiff was ousted because he was being too cautious in spending the group’s €1bn (£0.9bn) war chest. If this opinion is correct, his replacement may hit the ground running and propel Adecco into an aggressive acquisition phase.

The tone of staffing agency trading updates has remained downbeat in recent weeks. Matchtech issued a profit warning after a “significant reduction” in growth continued into its third quarter. In a Reuters interview, the finance director of Hays noted that the staffing market had not yet reachedbottom; the company was not experiencing growth in any of the 27 countries in which it operates and there were “no signs of
stabilisation”.

Michael Page’s Q1 update was more interesting. Net fees declined by 38% in January/February and, if we adjust for additional trading days this March compared to last year (largely Easter timing), the deterioration accelerated to around 50% in the final month of the quarter.

However, according to management, the areas of the business which entered the downturn first (North America and UK banking) are starting to show some evidence of stabilisation. Green shoots perhaps?

So, if trading is still weak, why have staffing share prices rallied? In February, I flagged that a number of forward-looking indicators of economic activity were no longer deteriorating and subsequent improvements have fuelled hopes that we are close to the bottom. This has been reinforced by directors buying shares, particularly at Robert Walters, as the eponymous Robert Walters has a great track record of buying and selling shares in his company. In 2003, a matter of weeks after what proved the bottom of a savage three-year bear market, he bought 159,000 shares at 61p. In April 2007, as sector valuations neared their peak, he offloaded 2.9m shares in three tranches at prices up to 360p.

• Kean Marden, support services equity analyst, head of research, Singer Capital Markets