City Comment: More than Olympics spirit needed to lift recruitment sector prospects
3 August 2012
While the Olympics could well help lift the spirits of the nation, particularly if our athletes start winning more gold medals, we believe the impact will be ephemeral with the post-Olympic hangover particularly painful. We therefore remain unconvinced by the short-term prospects for the recruitment industry.
Fri, 3 Aug 2012 | By Caroline de La Soujeole. industrial goods and services, equity research, Seymour Pierce
While the Olympics could well help lift the spirits of the nation, particularly if our athletes start winning more gold medals, we believe the impact will be ephemeral with the post-Olympic hangover particularly painful. We therefore remain unconvinced by the short-term prospects for the recruitment industry.
We warned in 2011 of the risks of a double dip in the economy. This has now materialized with a third consecutive quarterly decline in GDP reported and with seemingly no end in sight to the Eurozone’s troubles the outlook is not encouraging. Admittedly the fragile state of the UK economy is not likely to have a drastic impact on the larger UK-listed recruiters who, on the whole, are more exposed to trends outside of the UK (of the four larger quoted recruitment companies Hays derives the largest proportion of net fee income from the UK at ‘only’ 36% compared with 34% at SThree, 25% for Robert Walters and 22% for Michael Page).
However, more worrying is the fact that there are signs that Asia-Pacific, once the engine of growth for UK recruiters, is slowing. Until the Eurozone situation stabilises, it is unlikely we will see much uplift from Asia-Pacific. Recent results from recruitment companies paint a rather depressing picture. Robert Walters' Q2 trading update at the beginning of July showed a 2% decline in like-for-like net fee income (NFI) to £47.6m. This was followed by Michael Page's Q2 trading update, on 9 July, which showed that NFI had also declined by 2% at constant exchange rates to £138m below our and market expectations.
Unlike its peers, Hays did report an increase in NFI (helped by easier comparatives) at the time of its trading update (11 July), albeit this represented a sharp slowdown compared with the 10% uplift achieved in the previous quarter.
SThree reported its half-year results on 16 July, which were also somewhat disappointing in our view. Although NFI was up 11% to £99.9m, adjusted profit before tax was down 17% to £9.3m. The decline in profitability was attributed to the costs of expanding the international network and the relative immaturity of newer international teams that are yet to achieve full productivity.
As we write this column, Robert Walters has just released its half-year results, which also show a sharp decline in profitability with profit before tax more than halving, from £7.1m to £3.1m.
Where does this leave us in terms of our stock recommendation for investors? The Seymour Pierce Staffing Index has declined by more than 20% over the past 12 months yet a substantial economic recovery is still discounted in the prices of staffing stocks, which are trading close to historically high PE multiples (the sector is on 14.4x). We believe this is unsustainable. The small capitalisation sector’s valuation, which includes the likes of Harvey Nash, Hydrogen and Matchtech, is at a more palatable 7.8x.
Caroline de La Soujeole, industrial goods and services, equity research, Seymour Pierce
While the Olympics could well help lift the spirits of the nation, particularly if our athletes start winning more gold medals, we believe the impact will be ephemeral with the post-Olympic hangover particularly painful. We therefore remain unconvinced by the short-term prospects for the recruitment industry.
We warned in 2011 of the risks of a double dip in the economy. This has now materialized with a third consecutive quarterly decline in GDP reported and with seemingly no end in sight to the Eurozone’s troubles the outlook is not encouraging. Admittedly the fragile state of the UK economy is not likely to have a drastic impact on the larger UK-listed recruiters who, on the whole, are more exposed to trends outside of the UK (of the four larger quoted recruitment companies Hays derives the largest proportion of net fee income from the UK at ‘only’ 36% compared with 34% at SThree, 25% for Robert Walters and 22% for Michael Page).
However, more worrying is the fact that there are signs that Asia-Pacific, once the engine of growth for UK recruiters, is slowing. Until the Eurozone situation stabilises, it is unlikely we will see much uplift from Asia-Pacific. Recent results from recruitment companies paint a rather depressing picture. Robert Walters' Q2 trading update at the beginning of July showed a 2% decline in like-for-like net fee income (NFI) to £47.6m. This was followed by Michael Page's Q2 trading update, on 9 July, which showed that NFI had also declined by 2% at constant exchange rates to £138m below our and market expectations.
Unlike its peers, Hays did report an increase in NFI (helped by easier comparatives) at the time of its trading update (11 July), albeit this represented a sharp slowdown compared with the 10% uplift achieved in the previous quarter.
SThree reported its half-year results on 16 July, which were also somewhat disappointing in our view. Although NFI was up 11% to £99.9m, adjusted profit before tax was down 17% to £9.3m. The decline in profitability was attributed to the costs of expanding the international network and the relative immaturity of newer international teams that are yet to achieve full productivity.
As we write this column, Robert Walters has just released its half-year results, which also show a sharp decline in profitability with profit before tax more than halving, from £7.1m to £3.1m.
Where does this leave us in terms of our stock recommendation for investors? The Seymour Pierce Staffing Index has declined by more than 20% over the past 12 months yet a substantial economic recovery is still discounted in the prices of staffing stocks, which are trading close to historically high PE multiples (the sector is on 14.4x). We believe this is unsustainable. The small capitalisation sector’s valuation, which includes the likes of Harvey Nash, Hydrogen and Matchtech, is at a more palatable 7.8x.
Caroline de La Soujeole, industrial goods and services, equity research, Seymour Pierce
