Last Thursday, Randstadt, Europe’s second-largest staffing agency, surprised everyone with its second quarter results. Turnover was up 14% on a like-for-like basis. That was thanks to a powerful rebound in the hiring of factory workers in the automotive, manufacturing, transport and food industries – especially in Germany, France and America.
This trend is visible in white-collar positions too. Michael Page noted in June that the recruitment of office staff had accelerated. Given this broad-based recovery, should we snaffle up shares in Hays? I don’t think so.
Sure, the latest trading update on 8 July added weight to the bull case. There was an 8% rise in like-for-like net fees (payments from clients less direct payroll costs) due to soaring growth in Asia. Its non-UK units now account for 59% of the total. However, dig deeper and the outlook is far less rosy.
Despite reporting growth for the first time in two years, Hays is still heavily reliant on the ailing UK public sector (13% of net fees). It now faces budget pressures due to the government’s austerity measures. With another round of cuts expected in the October Public Spending Review, this part of the business is likely to get bleaker over the next few years. The board is sensibly diversifying into career advice and outplacement services, but this represents little more than scraping around on the margins.
Hays (LSE: HAS), rated a BUY by Evolution Securities
Realistically, Hays will only be able to replace this lost volume with sustained growth elsewhere, such as placing temporary staff (60% of group fees) at private companies. The problem, though, is that this sector is a lagging indicator – the recent snap-back is a tail-end output of the fiscal stimulus packages that are now ending.
I think that by mid-2011 the jobs picture will be pretty grim again. As dole queues lengthen, there will be less staff turnover, because those who want to jump ship will sit tight rather than move into risky new roles. So I would expect the stock to be trading at rock-bottom levels. Yet the City is predicting 2010 sales and underlying earnings per share of £2.5bn and 3.17p respectively, rising to £2.7bn and 4.76p in 2011. That puts the shares on lofty p/e ratios of 28.4 and 18.8. I would pitch the firm on a through-cycle earnings before interest, tax and amortisation (Ebita) multiple of ten. After adjusting for the £80m of net debt, that delivers an intrinsic worth of approximately 60p a share.
Income-seekers will argue that the stock is worth holding simply for the 6% yield. In reply I would warn them that the dividend could be cut if prospects turn south and Hays loses its appeal against a £30.4m price-fixing fine imposed by the Office for Fair Trading.
Hay’s preliminary results are due out on 2 September.
Recommendation: SELL at 94p