City Comment: Caroline de La Soujeole and Kevin Lapwood
28 March 2012
For most investors in UK-listed recruiters, 2011 was an annus horribilis with the sector underperforming the wider market by close to 40% as sentiment towards highly cyclical stocks succumbed to an increasingly uncertain economic climate. Hays and Robert Walters were notable underperformers, down 47% in the year.
Fri, 17 Feb 2012
For most investors in UK-listed recruiters, 2011 was an annus horribilis with the sector underperforming the wider market by close to 40% as sentiment towards highly cyclical stocks succumbed to an increasingly uncertain economic climate. Hays and Robert Walters were notable underperformers, down 47% in the year.
Since the turn of the year, share price performance has improved with the Seymour Pierce All UK recruitment index up by 14% in the month ending 15 February. But are there any real reasons to believe this rally has legs and that 2012 will be a better year for recruiters? We remain sceptical.The most recently released UK industry surveys were distinctly downbeat. The Monster Employment Index registered a rise of just 1% in January. In the same month the Morgan McKinley London Employment Monitor reported a 52% yearly decline in the number of financial services jobs.
The CIPD’s Labour Market Outlook suggested that the labour market will continue to weaken, while the REC/KPMG Report on Jobs painted a mixed view: recruitment of permanent staff rose slightly in January but hiring of temporary staff was lower for the second month running.
The Manpower Quarterly Outlook, which traditionally has been one of the more optimistic industry indicators, suggested that hiring expectations had slumped to their weakest levels since the recession.
Government data provide little cheer: the number of unemployed increased by 48,000 in the quarter ending December 2011 to 2.67m. The unemployment rate is up to 8.4%, a level not reached since 1995. Consumer confidence remains low and, with the impact of public sector spending cuts still to be felt, we would not be surprised if unemployment continued to rise during the first half of 2012.
There is some comfort for investors from the relative strength of overseas markets, especially Asia Pacific and Latin America. However, it would be naïve to think that international markets can continue to offset poor trading performances and economic uncertainty in Europe.
In the coming weeks, we will be hearing from the big four UK-quoted recruiters (Hays, Michael Page, Robert Walters and SThree). We do not expect managements to report a sea change in their outlook. Given limited visibility and the opaque macro economic background, caution will prevail.
Although recruitment companies have been substantially de-rated over the past six months, we do not believe now is an attractive entry point especially for the larger capitalisation stocks, which trade on elevated multiples.
In our view, small capitalisation stocks provide the most attractive investment opportunities in the sector. Their valuations are generally more attractive (they trade on an undemanding one year prospective P/E (Share price to earnings ratio of 8x compared to 16x for the recruitment sector as a whole) and they tend to operate in niche recruitment markets with strong structural growth drivers.
Caroline de La Soujeole, support services analyst and Kevin Lapwood, head of support services equity research, Seymour Pierce
For most investors in UK-listed recruiters, 2011 was an annus horribilis with the sector underperforming the wider market by close to 40% as sentiment towards highly cyclical stocks succumbed to an increasingly uncertain economic climate. Hays and Robert Walters were notable underperformers, down 47% in the year.
Since the turn of the year, share price performance has improved with the Seymour Pierce All UK recruitment index up by 14% in the month ending 15 February. But are there any real reasons to believe this rally has legs and that 2012 will be a better year for recruiters? We remain sceptical.The most recently released UK industry surveys were distinctly downbeat. The Monster Employment Index registered a rise of just 1% in January. In the same month the Morgan McKinley London Employment Monitor reported a 52% yearly decline in the number of financial services jobs.
The CIPD’s Labour Market Outlook suggested that the labour market will continue to weaken, while the REC/KPMG Report on Jobs painted a mixed view: recruitment of permanent staff rose slightly in January but hiring of temporary staff was lower for the second month running.
The Manpower Quarterly Outlook, which traditionally has been one of the more optimistic industry indicators, suggested that hiring expectations had slumped to their weakest levels since the recession.
Government data provide little cheer: the number of unemployed increased by 48,000 in the quarter ending December 2011 to 2.67m. The unemployment rate is up to 8.4%, a level not reached since 1995. Consumer confidence remains low and, with the impact of public sector spending cuts still to be felt, we would not be surprised if unemployment continued to rise during the first half of 2012.
There is some comfort for investors from the relative strength of overseas markets, especially Asia Pacific and Latin America. However, it would be naïve to think that international markets can continue to offset poor trading performances and economic uncertainty in Europe.
In the coming weeks, we will be hearing from the big four UK-quoted recruiters (Hays, Michael Page, Robert Walters and SThree). We do not expect managements to report a sea change in their outlook. Given limited visibility and the opaque macro economic background, caution will prevail.
Although recruitment companies have been substantially de-rated over the past six months, we do not believe now is an attractive entry point especially for the larger capitalisation stocks, which trade on elevated multiples.
In our view, small capitalisation stocks provide the most attractive investment opportunities in the sector. Their valuations are generally more attractive (they trade on an undemanding one year prospective P/E (Share price to earnings ratio of 8x compared to 16x for the recruitment sector as a whole) and they tend to operate in niche recruitment markets with strong structural growth drivers.
Caroline de La Soujeole, support services analyst and Kevin Lapwood, head of support services equity research, Seymour Pierce
