Getting inside the head of an analyst - City Comment
6 June 2013
It is seven in the morning and one of the staffing firms has just reported. After checking the company has met profit expectations, what are the first things analysts will typically look at?
Thu, 6 Jun 2013 | By Adrian Kearsey, equity analyst at Hardman & CoIt is seven in the morning and one of the staffing firms has just reported. After checking the company has met profit expectations, what are the first things analysts will typically look at?
Since changes in temp/perm mix can distort the top line, we like to focus on growth in net fee income (NFI), also known as gross profit (GP). [GP per employee is used as the basis for Recruiter’s annual HOT 100.] With considerable volatility in market conditions we tend to analyse growth rates generated in the last three or six months. Rates of growth being generated any further back can be hugely misleading to current trends.
The experience of the past 12 months highlights how firms can quickly see positive growth rates fall away and for some firms to start delivering negative like-for-like NFI growth. For example, in the second half of 2012 Hays saw NFI move positive (+2% from April-June) to negative (-1% from July-Sept).
With the increased internationalisation of many staffing firms it is also important to look at the geographic split of the business. We like to assess how firms are performing within particular geographies. Looking at the UK is a good case in point. Most results from the quoted staffers show a continued contraction in UK activity. However, interim results from Matchtech show UK NFI growth of 8%.
Admittedly, analysing NFI growth is like trying to drive the car by only looking in the rear view mirror. We do read the ‘outlook statement’ in an attempt to judge business confidence. However, we prefer to see what management are doing with headcount. If they are bullish about current trends they will be adding staff. If they are worried about business prospects they will want to shrink staff numbers, even if this is by natural attrition. The larger quoted staffers (Hays, Page and SThree) have been letting headcount move lower, reflecting a contraction in their market segments.
By contrast, Matchtech has been investing in the business, adding 8% to its sales force in the first half. Given the positive performance of its particular specialisms – technical and engineering – we would expect this trend to continue.
Finally, we look to see whether management have been buying temp business. They can achieve this by sacrificing margins. However, it is often achieved by offering extended credit terms. If management are pursuing this type of expansion it will be reflected in a jump in debtor days. In itself this policy is not a worry and often reverses within a short period. Recent trading from Harvey Nash highlights this point. Moreover, some major account clients require better terms and so an expanding debtor book can be a good thing (as long as the balance sheet can afford it!).
Crucially, most of the quoted staffing firms are in good financial strength with either net cash or with net debt to EBITDA ratios below one. Therefore, we are normally quite relaxed about debtor day movements, but are conscious many investors monitor this position closely, especially since it can be an early sign of over trading.
Since changes in temp/perm mix can distort the top line, we like to focus on growth in net fee income (NFI), also known as gross profit (GP). [GP per employee is used as the basis for Recruiter’s annual HOT 100.] With considerable volatility in market conditions we tend to analyse growth rates generated in the last three or six months. Rates of growth being generated any further back can be hugely misleading to current trends.
The experience of the past 12 months highlights how firms can quickly see positive growth rates fall away and for some firms to start delivering negative like-for-like NFI growth. For example, in the second half of 2012 Hays saw NFI move positive (+2% from April-June) to negative (-1% from July-Sept).
With the increased internationalisation of many staffing firms it is also important to look at the geographic split of the business. We like to assess how firms are performing within particular geographies. Looking at the UK is a good case in point. Most results from the quoted staffers show a continued contraction in UK activity. However, interim results from Matchtech show UK NFI growth of 8%.
Admittedly, analysing NFI growth is like trying to drive the car by only looking in the rear view mirror. We do read the ‘outlook statement’ in an attempt to judge business confidence. However, we prefer to see what management are doing with headcount. If they are bullish about current trends they will be adding staff. If they are worried about business prospects they will want to shrink staff numbers, even if this is by natural attrition. The larger quoted staffers (Hays, Page and SThree) have been letting headcount move lower, reflecting a contraction in their market segments.
By contrast, Matchtech has been investing in the business, adding 8% to its sales force in the first half. Given the positive performance of its particular specialisms – technical and engineering – we would expect this trend to continue.
Finally, we look to see whether management have been buying temp business. They can achieve this by sacrificing margins. However, it is often achieved by offering extended credit terms. If management are pursuing this type of expansion it will be reflected in a jump in debtor days. In itself this policy is not a worry and often reverses within a short period. Recent trading from Harvey Nash highlights this point. Moreover, some major account clients require better terms and so an expanding debtor book can be a good thing (as long as the balance sheet can afford it!).
Crucially, most of the quoted staffing firms are in good financial strength with either net cash or with net debt to EBITDA ratios below one. Therefore, we are normally quite relaxed about debtor day movements, but are conscious many investors monitor this position closely, especially since it can be an early sign of over trading.
- Click to read previous comments from Kearsey and other recruitment equity specialists on recruiter.co.uk
