Investment Column: Dividend rumours will slow Hays growth

Spice; Playtech
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The Independent Online

Our view: Hold

Share price: 98.05p (-1.75p)

Recruiters have had a miserable time in the recession. Without exception, the major players have suffered as clients have looked to shed staff.

And despite Hays' chief executive Alistair Cox saying his group's full-year results, issued yesterday, were resilient given the "toughest recruitment market ever", pre-tax profits did fall by 43 per cent, while like-for-like net fees dropped 18 per cent.

Hays does deserve credit for getting rid of its debt, and Mr Cox argues that the company has been able to take market share from competitors and invest for the future.

The news that will be met with a cheer from everyone is that Hays can see light at the end of the unemployment tunnel. "It is too earlier to call a recovery," says Mr Cox, "but the situation has started to stabilise." Investors can rightly assume that any improvement in the job market will have a positive impact on the share prices of companies like Hays.

We would not be buyers, however. We think Hays has done a creditable job of coping with the downturn, but a number of analysts said yesterday that they expected downward pressure on next year's dividend. Mr Cox rightly refuses to speculate on whether there will be a cut, but chatter among the experts will do no favours for those holding the stock.

To make matters worse, the watchers at Deutsche Bank argue that "Hays of all the staffers will struggle most in a recovery in our view ... Historically staffers take five years to get back to peak, implying that Hays would be on 9 times 2012... there seems very little reason for the stock to outperform the market, and we believe it will materially underperform if weaker pricing is seen."

We are more upbeat and think that the shares will tick up as the economy improves, but concerns on the dividend remain, and for that reason we would be reluctant to back the group until a firm decision is made. Hold.


Our view: Hold for now

Share price: 71p (+0.5p)

The analysts at Investec described the utility outsourcing group Spices performance as "robust". At the height of the financial crisis, that would have had the experts and investment writers alike salivating at the prospect of finding a stock that would withstand the collapse. Fast forward 12 months, and robust does not quite cut it anymore: the Investec watchers say hold, which admittedly they say is under review, and set a price target of 70p.

Spice is a well-run company, and the stock has rebounded well after taking a bit of a thump earlier in the year. Yesterday's trading update said that everything was in line, with the chief executive, Simon Rigby, adding that the group is confident, despite a challenging economic climate.

We would be holders of Spice, but we do expect other stocks to provide juicier returns. We would also be concerned that trading on a price earnings ratio of 9.9 times, the company comes at a 30 per cent discount to the wider support services sector. While this indicates that there is room for growth, we do not see how Spice will close the gap in the short term.

Those that still feel jittery about the economy (and yesterday's predictions from the OECD will not help) should probably buy. Though we like the group, we would think there are better buys available, particularly when Spice comes with a dividend yield of a rather lacklustre 2 per cent.

If the economy falls into the much-feared double dip, we would change our view and become buyers of Spice, but assuming we steer clear of that particular nasty, we would look for racier bets elsewhere. Hold for now.


Our view: Buy

Share price: 347.75p (+15p)

The problem with gamblers is that when they hit a hot streak they tend to get over-confident and bust out shortly afterwards. It's something Playtech – which provides software to the gaming industry – seemed have forgotten when it issued a profit warning in July as a result of its joint venture with William Hill running into difficulties. But it wasn't as bad as it sounds, and it is worth looking at the company again. And the overall signs are good, with interim pre-tax profits at €33m (£28m), from €24m last time.

The company has added a new liccensee, Olympian Entertainment, a gaming operator in Eastern Europe, which underlines its attractiveness as a partner. Another piece of good news is the appointment of new non-executive directors to ensure compliance with the Combined Code on Corporate Governance. This should help to attract new investors. Trading at 8.9 times 2010 forecast earnings, the stock is at a 55 per cent discount to PartyGaming. Roll the dice and buy.