The Investment Column: Hays may benefit from recruitment sector mergers

Greene King; Eaga
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The Independent Online

Our view: Cautious hold

Share price: 93.5p (-0.75p)

It will not come as a surprise to many people that, as the country battles with the ills of a credit crunch, a lacklustre housing market and inflation, the job market is not likely to be too hot over the next few months either.

What might come as more of a shock is that Hays, the recruitment group, has had a pretty decent time of it in the past 12 months. The company posted an impressive 25 per cent hike in profits and said its dividend is going to increase, albeit modestly, to 5.8p from 5p last year.

That is the good news. However, for those starting to think that Hays is a company to back, along with the investors who have pushed the stock up by nearly 20 per cent in the past month, there are warnings that should make them run a mile.

Hays operates largely in the UK and Australia. In the former, both the permanent and temporary job markets are in a state of flux. In Australia, while you stand a fighting chance of temporary employment, you have not got much hope of a full-time position.

True, the group does operate in other parts of the world and has seen the size of its business in Asia more than double in the past year – its revenues in Hong Kong are up 154 per cent – and the "internationalisation" of the company is the aim.

But that will not stop next year being tough. Analysts at Cazenove argue that there is not much juice left in the stock at its current level, saying that, on a price-earnings ratio of 9 times, Hays trades in line with its rival Michael Page, which is a better bet because it has wider international appeal.

That is why Hays is a conditional sell. The only reason investors should buy now is because the recruitment industry has the potential for a raft of merger-and-acquisition fun.

The Swiss giant Adecco has been courting Michael Page for a number of weeks but has hitherto been rebuffed. Those at Cazenove reckon that Adecco could turn its attention to Hays if it fails to land Michael Page, which could mean a healthy return for investors. Cautious hold.

Greene King

Our view: Sell

Share price: 581p (+48.5p)

The pub and brewery sector is going to become a pretty rotten one to invest in if Greene King's trading statement, issued yesterday, is anything to go by.

All is fine for the moment, they say, and full-year numbers will be in line with expectations: good news for current shareholders, whose stock soared by 9.1 per cent as the market breathed a sigh of relief. However, potential shareholders would be playing with fire by entertaining a punt now.

There were bits of good news: the group says that its higher-end restaurants, such as the seafood chain Loch Fyne, are "performing well" and its Scottish managed estate division Belhaven saw sales rise by 4.6 per cent.

However, the rest of the statement should do more to persuade investors that the whole pub sector is one to avoid. Like-for-like sales were down 1.6 per cent against hardly challenging comparisons given the wet weather last summer. The group also uses the phrase that a lot of struggling companies are inclined to turn to, saying that conditions are "challenging".

Watchers at Dresdner Kleinwort downgraded their target price from 750p to 650p, despite the group being their preferred pub stock and trading at a price earnings ratio of 5.9 times. The fact that Greene King has the option of converting into a Reit is an advantage, they reckon.

Indeed, Greene King is a useful option if it is pub stocks that investors are interested in, but the whole sector will lose ground for the foreseeable future. Sell.


Our view: Buy

Share price: 159p (+3p)

There are a number of companies up and down the land that are falling over themselves to prove how green they are. Eaga has a more genuine claim than most and has the added bonus of being an intriguing investment opportunity.

The outsourcing and managed services group, which fits insulation and greener heating appliances to social housing, depends on the Government for about 80 per cent of its revenue. The remaining 20 per cent comes largely from utilities forced by government to make their activities more environmentally friendly.

On the one hand, it appears to be working. The company announced full-year numbers yesterday, showing a hike in pre-tax profits to £28.4m, up from a loss of £87.4m last year. However, despite the chief executive John Clough's claims to the contrary, the group's shares are just about fully valued, trading on a price earnings ratio of 11.6 times.

New investors might not see an immediate upturn, but, nonetheless, they should buy Eaga. Government legislation is heading in one direction to try to combat climate change, and companies that do heat the planet will be under increasing pressure to do something about emissions. Eaga is perfectly placed to benefit from this.

Even the environmental refuseniks who think that climate change is mumbo-jumbo will be interested in Eaga's defensive nature. Buy.