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Investment Column: SThree has the skills to keep growing

Hyder Consulting; Gooch & Housego

Our view: Buy

Share price: 395.9p (+2.5p)

The overall UK recruitment market might be sluggish but this did not stop SThree, the specialist permanent and temporary staffing business, growing its gross profit by nearly a quarter in its first half.

This appeared to vindicate the long-term strategy of SThree – which still derives the bulk of its revenues from IT and technology placements – of extending its reach into other sectors, from finance to pharmaceuticals, as well as growing its international presence to 55 countries.

Moreover, the company has continued to grow both permanent and temporary placements in the UK, up by 6 per cent and 5 per cent respectively, over the six months to 29 May with fees improving thanks to its focus on specialist recruitment, such as engineers for the oil industry and mathematicians for investment banks.

The average salary for a permanent placement done by SThree is £50,000 and £90,000, on a pro-rata basis, for contractors. Gross profits jumped by 23 per cent to £90m over the period, which was ahead of City expectations. However, growth at its overseas operation – spanning countries from France and Germany to its recently opened office in Brazil – continues to outstrip the UK.

Non-UK profit grew by 34 per cent over the period, while the UK posted a more modest 9 per cent rise. The sluggishness of the wider UK job market was laid bare by a recent Markit survey, which said permanent placement and billings for temp staff rose at their weakest rate for seven months in May.

Indeed, SThree's non-UK operations accounted for 63 per cent of the group's £90m gross profit. Overall, we think there is much to recommend SThree, despite a good run in its shares since November, which leaves them on a forward earnings ratio of 15.3 times.

Perhaps more enticing is the expectation in the City that SThree will pay a special dividend to release some of the £47m of cash on its balance sheet to shareholders. But it is the international growth and expansion of the company that makes us buyers, despite the sluggish UK market.

Hyder Consulting

Our view: Buy

Share price: 390p (+3p)

We have been fans of Hyder Consulting since last summer. The intervening period has seen the shares enjoy a heady rally, and a vertiginous slump, but overall, they're up more than 15 per cent. The question, then, is whether now is the time to bank profits or hold on for more – or maybe even add to our holdings in anticipation of further strong gains.

The first option was torpedoed by the design and engineering consultant's full-year results. The headline figures surpassed market hopes as its margins advanced over the course of the year. Cash generation was also strong, and the group upped its full-year payout for shareholder by nearly 30 per cent.

Needless to say, this is not one to sell. You would, however, think that recent gains would have made Hyder too pricey to be seen as a buying opportunity. Well, at around 11 times forward earnings, the stock trades in line with the sector average, which looks harsh, in our view. The group's strong performance, not to mention its international exposure, merits a higher rating.

All this points to only one thing and so, despite being well-placed to bank profits, we are extending our call. We expect Hyder to deliver further gains in the months ahead.

Gooch & Housego

Our view: Hold

Share price: 584p (+15p)

Gooch & Housego has produced a stunning turnaround since a decidedly shaky period during the downturn. The shares have leapt from a nadir of under 50p during 2009. But is there more to come?

The company produces a range of optical equipment, lasers, fibre optics and the like across sectors including aerospace and defence. Sales are global, reassuring to those nervous about Britain's struggles. The group has also made some sensible acquisitions that have diversified the product range and enhanced existing capabilities.

As a result G&H has been a big beneficiary of the global recovery, with revenues and profits rising nicely. The historically stronger second half should prove even better, and the interim dividend is back.

And though the shares are no longer cheap at 17 times forward earnings, they are worth holding. We would, of course, buy in the event of a pullback.