The Investment Column: Hold on to Hays for European growth

Henderson; Taylor Woodrow
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The Independent Online

The deregulation of Continental Europe's jobs arena represents a great opportunity for the recruitment sector and Hays is certainly taking advantage of it. Yesterday's interim results saw the group deliver a 40 per cent jump in the fees it earns from its overseas operations. Although this figure includes a good performance by Hays in Australia, it is clear that the company is now truly starting to cash in on markets such as France and Germany where the business of specialist recruitment is still in its infancy.

These countries have had little choice but to reform their rigid labour laws, making them more akin to those in the UK, and opening up huge growth opportunities for recruitment players. Hays expects mainland Europe to deliver growth of 18 per cent per annum for the foreseeable future and to take advantage of this it plans to beef up its operations. At present this fast-growing (from a recruitment industry perspective) part of the world accounts for 13 per cent of the business.

Likewise, Asia Pacific is another region Hays sees as high-growth. Over the past six months it has opened new offices in Hong Kong and it hopes to add to this during the course of 2006. Nevertheless, Hays' core business - slightly more than 70 per cent of the group - remains the UK and Ireland and here trading has not been so brisk. Growth rates seem to be tailing off in what are bread and butter sectors for the company - accountancy/finance recruitment along with construction and property. The blame lies with the slowdown in the UK economy

Overall, Hays delivered a 17 per cent jump in first half pre-tax profits to £95m. Cash flows were also impressive - up from £75m to £84m for the six month period. The group will use some of this to pay for the expansion of the business abroad and the remainder will be returned to shareholders. When it comes to giving money back to investors, Hays has quite a track record. Last year it bought back £312m worth of its owns shares. At 16 times forecast earnings for 2006, the stock trades at a slight premium to the UK market but pretty much in line with peers. Hold.


Having disposed of both its closed life insurance book and UK financial adviser arm last year, Henderson Group's transformation into an uncomplicated fund management company is finally complete. So what's next?

With assets under management of about £68bn, Henderson's main problem is that it is neither big nor small. This has left its chief executive Roger Yates with a dilemma: either make a play for the big time, snapping up a rival to give the company scale, or try to carve a niche, focusing the future on organic growth.

Although Mr Yates' instinct was originally to go for the latter option - insisting that most fund management mergers destroy rather than enhance value - Henderson is now one of the final bidders in the auction for its UK rival, Gartmore.

If the group succeeds, Mr Yates' nightmares about value destruction may well come true. Gartmore and Henderson have a considerable overlap in the UK, meaning managers will need to be axed, brands will have to be merged or disposed of, and clients will inevitably walk out of the door.

However, if Henderson walks away from Gartmore - and hands back the money to shareholders - it remains in an awkward position. Medium-sized firms that have tried to be all things to all people in the past have not got very far.

After a good two-year run, during which time the stock has doubled, now is the time to take profits.

Taylor Woodrow

If it was not for the performance of its US house building division yesterday's annual results from Taylor Woodrow would have been dire. As it turned out, Britain's third-biggest house builder managed a lacklustre 2 per cent rise in pre-tax profits to £411m thanks to a whopping 56 per cent jump in the profitability of its American operations.

But clouds are gathering for the company across the Atlantic. The US housing market is cooling and although the states in which Taylor Woodrow operates - Florida, Texas and California - are still seeing solid growth, it is only a matter of time before they too come off the boil should the wider market hit the skids.

2005 was another tough year for the group in the UK where it makes the bulk (60 per cent) of its money. Profits declined 23 per cent, driven by lower margins, prices and volumes. Taylor Woodrow finished the year with a forward order book flat on the previous year. Although it experienced a pick-up in demand during the fourth quarter, the management declined to make any predictions on how 2006 is going to turn out in the UK, saying it was simply too early to say.

There was also bad news on the pensions front as the deficit of Taylor Woodrow's scheme rose from £100m to £154m. The current year is forecast to see profits at the house builder fall to £400m and at yesterday's closing price of 416p that leaves its shares trading at 8.8 times forward earnings. Although this is a discount to the wider sector, now is not a good time to be invested in house builders and especially in Taylor Woodrow. Avoid.