James Moore: Recruiters look good long-term, but now it's best to bide your time

Investment View: Longterm, I would be a buyer of the sector. Firms have internationalised their businesses and so have good prospects
Click to follow
The Independent Online


Our view: Avoid for now

Share price: 87.3p (-0.1p)

On the face of it, Hays' results could have caused a few raised eyebrows. The recruiter's UK business slipped into the red for the first time, while its dividend was cut sharply. And yet the shares shot up on the day of the announcement.

What's going on? Well, the dividend cut – of 55 per cent – hardly came as a surprise.

Hays had held it for two years at its pre-recession level, but the payment was not covered by the reduced level of earnings that the company is enjoying now.

At the new level the payout is comfortably covered by those earnings, and the prospective yield has slipped to a realistic figure of just above 4 per cent from an eye-catching 7 per cent. Income seekers take note.

The company, to its credit, has also given some good guidance on what to expect in the future. Namely that management want to keep dividend cover at 2.5 times earnings or a bit better, and the payment won't start to increase until operating profits hit the £140m mark for the full year.

That could be next year, if you take a really optimistic view, but is probably more likely to be somewhat further out.

Notwithstanding that, the numbers themselves weren't all that bad. Net fees for the six months ending 31 December came in at £373.8m , up 15 per cent, or 11 per cent on a like-for-like basis while pre-tax profits sauntered in at £60.3m, up 24 per cent.

The company's admission that things took a turn for the worse in the second part of the period appears worrying, but what may have cheered the market was chief executive Alistair Cox's indication that this year has started off well.

Much of the attention with Hays focussed on the UK business, which fell into loss for the first time (£3m), not least as banking recruitment slowed. As such, savings of up to £15m are being targeted for the back office.

Mr Cox argues that all of Hays' consultants are profitable and so he doesn't want to lose any.

Elsewhere in the world, however, things are much brighter for the company. Asia continues to grow strongly as does Australia, while Germany looks chipper and France is holding its own.

Mr Cox points out that only the US and the UK (and to a certain extent Australia) are really "mature" markets for recruiters. Their presence in other markets is much lower.

That might not be such a bad thing: companies and the public sector have become arguably over-reliant on recruiters here. But it does make for a very solid investment case.

Internationally, Hays and its peers are in a strong growth business.

The trouble is their fortunes are strongly geared to the economy's. When it slows, companies stop hiring. Employees also lose their confidence and stop moving. Fees dry up.

Recruiters also have little visibility in good times, let alone difficult times like now. And yet Hays is not cheap based on its earnings multiple (16 times forecast full year) and the shares have been on a very strong run.

It is by no means the most expensive of the recruiters. Michael Page trades on about 30 times this year's earnings and offers a prospective yield of just above 2 per cent.

This column has been a fan of the company, whose clients tend to earn more than Hays', but it has endured a profit warning and while the rating is not as high as it was, Michael Page is one to keep a watching brief on.

Robert Walters', which is smaller, has a rating that is closer to Hays', while SThree is a little higher and both merit holding for now, but no more than that.

Long term, I would be a buyer of the recruitment sector. All the above have been internationalising their businesses and have good future prospects as a result. But right now, things are too uncertain to pay for shares on the sort of ratings the sector enjoys.