Investment Column: Valuation offsets the risks around Hays

XP Power; Victrex

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The Independent Online

Our view: Buy

Share price: 72.55p (+5p)

Yield is a rare commodity in today's economic climate and even 5 per cent seems impossibly rich. But Hays offers a prospective 9 per cent. Of course, unusually high yields are often matched by high risks, and this is very much the case with Hays.

Britain's biggest recruiter has been under a cloud as far as its share price is concerned because of the potential impact of the prevailing economic turmoil on its prospects.

The fear is that companies will stop hiring and employees will sit tight and stop moving. That is already the case in Britain. Yesterday's trading statement from the FTSE 250 listed group showed that fee income in the UK and Ireland over the three months ending 30 September had declined by 4 per cent. However, the international business told a very different story, growing by a a better-than-expected 21 per cent (Asia) and 34 per cent (Europe and the rest of the world).

On the upside, Hays' overseas operations account for 68 per cent of the business. And, despite pressures closer to home, Hays does have opportunities in the UK, where 80 per cent of vacancies are filled by recruiters. The US and the Netherlands boast similarly high rates.

But it should be remembered that much of the rest of the world is something of a greenfield site. Even in places like Germany, employers tend to do their own recruiting. If Hays can show it can find better staff more quickly and cheaply than in-house teams it will grow its business fast.

It is true that recruiters have very limited visibility, and whether current growth levels are sustainable is open to question. We are also uncomfortable with the debt level – £175m when its rival Michael Page has none – and the prospect of dividends coming out of debt if earnings don't measure up.

Still, even if the divvy does face a cut next time round, Hays shares look cheap at just 8.5 times September 2012 earnings. Hays is a risky bet, but could just be worth a punt in light of the valuation.

XP Power

Our view: Avoid

Share price: 930p (-90p)

XP Power, the London-listed, Singapore-based manufacturer of power control components for the electronics industry, disappointed shareholders with its latest interim management statement yesterday.

Not that there is anything new in this, as shares in XP Power have fallen by about a half in the past seven months against a backdrop of growing concerns about the challenges faced by the global economy.

XP Power continued to put a brave face on things yesterday, arguing that the low interest rates that have resulted from tough economic conditions in the West should increase demand for the equipment made by its customers.

However, the company, which makes components that convert power from the electricity grid into the right form for electronic equipment to function, conceded that demand for its products would be hit by what it described as "the increasing negativity of global end-market growth forecasts".

XP sought to reassure investors, saying that it had a solid order book, although the group tempered this statement by saying there "had been some recent customer push-outs in North America".

Although the company's share price has taken a hammering in recent months, the shares are still trading at levels well above their historical average, and the likely slump in the global economy suggests they may have further to fall. We'd keep away.


Our view: Hold

Share price: 1,121p (+63p)

The polymers specialist Victrex may not sound like the most fascinating company in the world. But the numbers confirm it as an exciting investment prospect, given the scope for wider use of its products in industries such as oil and gas.

Yesterday's update reassured us that full-year profits would be in line with market hopes. And initial trends for October suggest that the company is continuing to perform well.

Of course, the bears will say that another slump could hit the company, which, as Peel Hunt noted, "was highly cyclical through the 2009 downturn". But the broker also noted that the reason for this was global de-stocking, as customers ran down their inventories. That is unlikely to happen again, as the slump was fairly recent. Still, sentiment in the stock market is weak, as is apparent from the recent pull-back in Victrex shares. So, while we would keep backing the company, we would not add to our holdings.