Recruitment's still not one for the fainthearted

Sober times ahead for Yates; Radstone's high enough for now
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The Independent Online

Is it time to call the turn on the UK's beleaguered recruitment sector? Things certainly look bleak at the moment and valuations of quoted employment companies are at bargain-basement levels. With banks and professional services companies continuing to cut back on staff and major companies behaving cautiously too, this is hardly surprising.

Is it time to call the turn on the UK's beleaguered recruitment sector? Things certainly look bleak at the moment and valuations of quoted employment companies are at bargain-basement levels. With banks and professional services companies continuing to cut back on staff and major companies behaving cautiously too, this is hardly surprising.

The industry data does not provide grounds for optimism either. Yesterday's official unemployment figures for April showed that the number of benefit claimants had seen its highest jump for a decade. This followed weak May figures from the Recruitment and Employment Confederation.

But a new research note on the recruitment sector by Altium Capital says there are reasons to start considering this area again in the medium term. The research, by the analyst Geoff Douglas, states several reasons why. It says that the UK recruitment market might be at the bottom of the cycle, that the sector is one of the few remaining highly cyclical plays left on the market and that operational gearing in these companies can be high indeed as additional fees are leveraged off a low-cost base. In addition the research adds that the quoted recruitment companies are financially strong, unlike their heavily indebted state during the last downturn. The final ingredient in the mix is the possibility of takeover action. Talk of deals was sparked by Spring Group's takeover of Best International last week and shares such as Robert Walters showed signs of life. Michael Page could be a target for Hays or Adecco, some analysts said.

There is little reason to buy into the sector now. Indeed Altium says that recent gains could be given up during the traditionally weaker summer months for the stock market.

But during the third quarter it could start to look interesting. Altium's top sector picks are Michael Page, Robert Walters, PSD and Spring. Michael Page is the largest and most liquid stock while Robert Walters has a strong balance sheet with net cash of £18m. Other stocks look more risky. Whithead Mann, the executive headhunting specialist, has slumped into loss. The sector is an interesting recovery play, though not one for the fainthearted.

Sober times ahead for Yates

There are two ways of viewing Yates, the high street bars operator. Through beer goggles, the company's decision to swap faux-Victoriana for the 21st century, by revamping its estate and consigning the "Wine Lodge" tag to the dustbins of history, looks pretty good.

Like-for-like sales across the 47 sites that have received the facelift actually rose 3.5 per cent last year. The group's Ha! Ha! brand, which majors on food served from quirky locations, is also performing well. But in the sober light of day, things are not so pretty.

Like-for-like sales across the bars still waiting for their makeover fell 6.8 per cent last year, dragging total like-for-like sales down by 3.7 per cent. More worryingly, the trend has got worse since the start of the group's financial year, with uninvested sales down by 11.1 per cent. Because Yates operates at the cut-throat end of the drinks market, on high streets where cheesy bars are two-a-penny, it is feeling the pinch of the downturn that has already forced Po Na Na and Old Monk into administration. As a result, there are now big question marks surrounding the sustainability of the sales uplift.

Last year was the third on the trot that the company has reported falling profits (down 17 per cent at £10m before exceptionals) and the sixth in a row that margins have slipped. The group, which owns 154 sites, plans to jazz up a further 40 Yates's bars by the end of this year, and yesterday said it was all systems go for rolling out its Ha! Ha! brand. It sees scope for 50 venues but acknowledges that this will take some years to achieve.

The group may think it has found a saviour in Mark Jones, the well-regarded former chief executive of Pizza Hut, but even he might struggle to serve up something tasty for investors. The shares, up 4.5p at 89p, are high enough after a strong run. Avoid.

Radstone's high enough for now

You might think that the Iraqi war would provide a boost in orders for Radstone Technology - which designs and sells such hard-wearing technology that it can be fitted in tanks.

Customers include all the big names in the defence sector such as Lockheed Martin, BAE Systems, Northrop Grumman and Harris Corporation.

And a first glance at yesterday's full-year figures would bear that out.

Pre-tax profits were up 34 per cent to £6m and sales were up 18 per cent to £48.5m, implying the build-up to the war was positive for business.

But the company concedes that it may now be affected by short-term fluctuations in orders - implying that life can get more tricky both during and after conflicts.

Analysts point out that the uncertainty created by war can mean defence programmes get pulled forward, reprioritised and cancelled - leaving Radstone exposed because it is still a relatively small business, dependant on a small number of programmes.

That is borne out in the company's order book. As at the end of March, Radstone Technology's order book stood at £62.7m - down 15 per cent in sterling terms on the same period a year before.

This has led analysts to assume the business will only produce a more or less flat performance this year of £6.4m for the current year, translating to earnings of 18.5p a share.

Those estimates put the stock, down 5 per cent at 270.5p last night, on a forward rating of nearly 15 times. Given the outlook and the recent sharp rally in the shares, that seems high enough for now.

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