The recruitment sector looks poised for a recovery. Here's an overlooked share that's very well placed to benefit.
There are few sectors which suffered as badly as recruitment in the stock market slump. Even the big beasts of the recruitment world, such as Hays Group (LSE: HAS) and Michael Page International (LSE: MPI) saw their share prices tumble by two thirds. Small players were hit even harder. Hydrogen Group (LSE: HYDG), for example, saw its share price slump by over 90%.
Green shoots
After hitting a low in March, the FTSE 100 has now rebounded by 34%. Many of the stocks that have benefited have been those which were perceived as the most risky and therefore had fallen the most. Not surprisingly therefore Hays Group has rebounded by 41% and Michael Page International 55%.
Last week international recruitment behemoth, Adecco, announced a recommended cash offer for the loss-making Spring Group (LSE: SRG). The offer was a 48% premium to the price before bid talks were announced. Trade buyers are able to take a longer term view of valuations and the deal might suggest that those in the industry believe values have now fallen to attractive levels and the bottom in the market has now been reached.
Recruitment is a typically cyclical industry. In the bad times, clients cut back on recruitment and candidates are plentiful. Companies respond by laying-off consultants and back office staff. Nonetheless the fixed costs of maintaining office infrastructure can mean profitability is hit hard. When better times return a shortage of candidates allows recruitment companies to make good profits, taking on more and more recruitment consultants to meet strong demand. Profits soar.
It's a classic scenario and one which private investors can take advantage off. Good companies, with strong market niches and the balance sheet strength to see out the hard times will eventually benefit strongly as conditions recover. The secret is to find these companies before their share price reflects their recovery prospects, buy and wait.
Matchtech
One company which I believe fits these criteria is Matchtech (LSE: MTEC).
1. What do they do?
Matchtech (LSE: MTEC) is one of the UK's leading specialist technical recruitment companies, providing permanent and temporary placements for the engineering, science and construction sectors. It's a niche sector and Matchtech is the leading player. Many of its contractors are supplied to long-term infrastructure projects and it minimises costs by operating from a single office.
2. Management
Matchtech was set up by the current chairman, 55 year old George Materna, in 1984 and he still holds 34% of the shares. During the 25 years of its existence it has grown impressively to a turnover of £259m. Furthermore the lack of goodwill on Matchtech's balance sheet reflects that this growth was achieved without expensive acquisitions.
Chief Executive, Adrian Gunn (aged 43), has been with the company for 21 years and the Finance Director, Tony Dye (aged 39), for 13 years. Both also have meaningful interests in the shares of the company.
This is an experienced, successful and long-term management team who've no doubt seen both good and bad periods many times before. Their shareholdings align their long-term interests with those of other shareholders.
3. Debt
As I've repeated numerous times, debt is the real killer of businesses. Two weeks ago, in its trading statement, Matchtech reported net debt had fallen to a mere £1.3m. For a £259m turnover company with net assets of £19m and gross assets of £37m, that's almost nothing. In its interim results, Matchtech confirmed that its banking facilities of £27.5m had been extended to March 2011.
4. Trading
Like most recruitment companies Matchtech has been hit by the recession. Indeed its recent trading statement revealed a 9% fall in net fee income in 2009 and even tougher trading in the last quarter. House broker Arbuthnot Securities forecasts a continued fall in both profit and earnings per share:
| | Profit before tax | Earnings per share | Price earnings ratio |
|---|
| 2008 Actual | £12.8m | 39.3p | 3.8 |
| 2009 Forecast | £11.3m | 33.1p | 4.5 |
| 2010 Forecast | £8.0m | 23.4p | 6.3 |
However under the circumstances that's hardly a disaster. Matchtech confirmed that "the Group is well positioned to trade profitably and generate cash through the downturn". I estimate that even during a tough last quarter Matchtech traded comfortably in profit.
The icing on the cake is that Matchtech pays a dividend of 15.6 pence. That is a dividend yield of 10.5%. Only two weeks ago Matchtech confirmed that it "remains committed to its existing dividend policy". Arbuthnot is forecasting that the dividend will be maintained. With the dividend more than covered by earnings and a strong balance sheet there is no reason that it shouldn't.
5. Share price
During the stock market slump Matchtech's shares dropped by over 75% from the peak of 500p a share, to 125p. However, so far it has failed to match the recovery of the bigger players; up only 18% to 148p. Whether you believe any recovery is imminent or not, it does not appear to be reflected in Matchtech's price.
Matchtech looks to me like it has the experienced management, balance sheet strength and the defensive qualities to survive the recession unscathed. With its meagre rating and a share price yet to reflect the recruitment sector re-rating of the last few months, Matchtech looks well placed to see its share price soar in the future. In the meantime however there is a tasty dividend yield for comfort. I've tucked some away for the long term.
More from Steve Scott:
Steve holds shares in Matchtech.
