Thu, 25 Oct 2012 | By Caroline de La Soujeole, industrial goods and services, equity research, Seymour PierceIn September we published our ‘Staffing Handbook’, a quarterly analysis of the health of the global recruitment industry. Our study showed that we hadn’t reached an inflexion point yet with few signs of sustained improvement in key labour markets. We highlighted the fact that, in our view, the share prices of UK listed recruiters under our coverage had run ahead of expectations.

Our stance that there was still some downside has been borne out by the performance of the sector over the past month: the Seymour Pierce Staffing index underperformed the FTSE All Share by 3.3%. We remain cautious: it is still too early to call the bottom of the cycle in our view.

Since our last column for Recruiter, we have heard from a number of recruiters. Michael Page (now PageGroup) was the clear laggard: its Q3 2012 net fee income (NFI) was 5% lower than market expectations following a sharper than anticipated 6.5% year-on-year decline in NFI. This prompted us to downgrade our full-year profit expectations by 12%.

Robert Walters produced a respectable 3% increase in NFI in its Q3 2012, although this partly reflected strong growth from the lower margin UK RPO business. Most noteworthy, however, was the continued decline in Asia-Pacific (-6%), a region which had been a key driver of growth for the more internationally minded recruiters. The subdued trading conditions in APAC are a concern in our view.

Not to be the bearer of bad news on all things staffing, we have turned more positive on Hays. The firm reported better than anticipated Q1 trading with NFI down by only 1% in the quarter (compared with market consensus of -2%). We are more comfortable with Hays’ perm/temp balance (circa 50:50 compared with 80:20 for Michael Page). Typically staffing recoveries start in temporary placements and we believe Hays is well placed to capitalise on this, whenever this may occur.

Although we are cautious on the outlook for recruitment stocks, we remain positive on the smaller market capitalisation stocks, which tend to operate in niche markets. We are still seeing signs of life at the smaller end of the spectrum as evidenced by Harvey Nash’s and Matchtech’s recent results. Small cap recruitment stocks provide much more compelling value for investors: the small cap Seymour Pierce Staffing index is trading on a one-year prospective price/earnings (P/E) ratio of 8.3x compared to a hefty 17.3x for the staffing sector as a whole.