Small-cap focus: recruiters enjoy foreign gains

Published: 27 Feb 2018 By Hannah Murphy

Source: Financial Times, published on 8 December 2017

Recruitment companies can celebrate riding out knocks to UK hiring this year after the Brexit decision as long-developed international and sectoral diversification strategies pay off.

Shares at large recruitment outfits such as Hays and PageGroup dropped as much as 30 per cent in the immediate aftermath of the vote as the economy cooled, corporates froze hiring and employees became more nervous about job hunting.

But they have since recovered, buoyed by healthy growth overseas, and are now trading well above pre-Brexit levels.

In the short term, uncertainty around the exact terms of a Brexit deal remains a bugbear. In the longer term, the industry will have to adapt to several broader structural changes. These include a shift towards the so-called gig economy, technologies such as AI threatening the recruiters’ role as intermediaries, and the digitisation of swaths of jobs that they might typically have placed.

Some analysts are already raising red flags. On Wednesday, shares at the big two dipped after Deutsche Bank warned that the sector was overvalued, noting “the structural pressure on gross margins, driven by improved procurement and technology”.

These challenges are no less real for small and mid-cap recruitment groups, although some argue that their more specialist nature could lend a competitive edge. For now, they too are mitigating the Brexit storm, with mixed approaches.

SThree

Like its larger rivals, the specialist science, tech, engineering and maths recruiter has been able to offset Brexit-related jitters in the UK with a strong performance in other regions, particularly America.

Gross profits in the latest quarter jumped 20 per cent to £17.3m in the US and ticked up 6 per cent in continental Europe, against a 10 per cent drop in the UK and Ireland. Overall, group profits increased 5 per cent.

Despite the UK blip, shares have reacted positively: after losing 37 per cent towards the end of last year to touch a multiyear low of 221p, they are now trading at a near-exact pre-Brexit level of about 350p.

The group continues to implement cost-cutting measures as part of a UK-focused restructure that has already involved a reduction in headcount. Last month, it triggered analyst upgrades when it announced plans to move global support staff from London to another, as yet unnamed, UK city. SThree estimates the move will deliver annualised savings of £4m-£5m from 2019.

The group says it has positioned itself to accommodate the increasing number of white-collar workers who opt for project-based work over permanent roles, and now manages “ongoing relationships” with 10,000 contractors globally. It has a market capitalisation of £453.1m.

Robert Walters

The group, which focuses on finance and technology roles, upgraded its full-year profit forecast for the second time in October, pushing shares to record highs.

Its latest quarterly results boasted a double-digit increase in gross profits, including 15 per cent growth in the UK, driven in part by rising demand for its outsourcing division. Unlike SThree, Robert Walters has been expanding headcount, which was up almost 20 per cent year-on-year in the third quarter.

Analysts at Liberum said “structural opportunities” in certain regions plus an “attractive” outsourcing business left it “better placed than many of its peers”. It is now trading at 570p, up 67 per cent in the year to date, giving it a market capitalisation of £429.2m.

Still, Robert Walters, the group’s eponymous chief executive, has warned that the UK’s financial services sector is still “treading water” with regards to hiring activity. But he noted the group, which operates in 28 countries, would be well positioned as its offices on the continent could benefit from any potential staff moves.

Harvey Nash

Shares at the IT and tech specialist have also returned to above pre-Brexit levels to reach 80p, up 29 per cent in the year.

This gives the company a market capitalisation of £58.8m, shortly after it moved from London’s main market to list on the junior Aim index in July.

The performance comes on the back of robust growth. In interim results in September, pre-tax profits rose 14.2 per cent to £4.4m on a constant currency basis, on revenues up more than 9 per cent. Beyond organic growth, Harvey Nash has been acquisitive this year, most recently when it bought IT solutions and recruitment group Crimson in September in a £15m deal.

Analysts at Panmure Gordon, who estimate the deal will be 10.9 per cent accretive in its first full year, said the move was part of a “transformation strategy”, based on investing in existing markets to deliver “ongoing margin improvements”.

Panmure expects profits at £10.7m in 2018, up almost 25 per cent year on year. The group, which has 40 offices across the world, has said it will continue to hunt out “value-enhancing acquisitions”.

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