The sun appears to be shining on the recruitment sector.
Three of the four largest listed companies in the recruitment sector, Michael Page (LSE: MPI), Hays (LSE: HAS) and Robert Walters (LSE: RWA), were upgraded to buy recommendations by Goldman Sachs last week, following some upbeat results and trading statements. The fourth, SThree (LSE: STRH), is not covered by Goldman.
Despite fears of a possible double-dip recession the jobs market is showing positive signs, particularly in the City where confidence is returning. Recruiters do not need new jobs to be created, only that people are willing to take the risk to change jobs.
But more importantly these companies have been boosted by international revenues, which account for over half of net fees for all four companies.
Having been battered by global recession, they are looking forward to growth. Is it time to get on board?
The Mid-Market
All four companies operate in the mid-market, white collar segment. They recruit for professional positions, below the level occupied by head-hunters such as Heidrick and Struggles and Korn/Ferry, but above the generalist, blue collar segment in which companies such as Adecco, Manpower and Kelly operate.
Michael Page is best known for finance and accounting, which make up nearly half of its net fee income. It has a corporate, collaborative culture with its consultants receiving a share of profits based on their performance rather than receiving commissions as in the more typical "eat what you kill" culture.
Hays has been trading as a pure specialist recruitment group since shedding the last of its diversified activities in 2004. It is pitched at a somewhat lower segment, with candidate salaries typically in the range of £15,000 to £50,000 in the UK (compared to Michael Page's £50,000 to £150,000 level) though its Asian and European arms target higher salary brackets.
SThree is focussed on the ICT (information and communication technologies) market, and trades under four main brands: Computer Futures, Huxley, Progressive, and Real Staffing Group. It began trading on the LSE in 2005, and is positioned more to serving the SME market than the big corporate segment.
Finally Robert Walters, the smallest of the four which was listed in 2000, was historically associated with recruitment in the accountancy sector but has broadened out to cover professionals in the £30,000 to £200,000 bracket.
Industry Drivers
Recruitment is driven by levels of economic activity and business confidence. Recruitment companies have relatively fixed costs (of which staff costs represent around 75%), so operational leverage is high.
The industry also suffers from low earnings visibility. Income is not earned until a candidate is placed in a job, which may be several months after work has started on the mandate, and the client can stop the process at any point. Thus it is difficult for recruiters to confidently predict their earnings into the future.
Taken together, these factors make the sector highly cyclical.
The UK, Australia and North America are mature markets which are very competitive. Despite the presence of large, global players they remain fragmented as the barriers to entry are low.
In Europe, Asia and Latin America the recruitment market is less developed, and typically recruitment is undertaken by companies' own human resources departments.
However the market for recruiters is growing in these regions driven by the globalisation of recruitment, increasing job mobility and changes in legislation which simultaneously imposes a compliance burden and frees up markets for foreign entrants.
Four Companies, One Strategy
The four companies have similar strategies for growth. They can do so without overly intensifying the competition between themselves because the industry is so fragmented.
Key aspects are:
- managing costs by selectively shedding staff in the downturn but retaining capability for the upturn in activity. Hirings have been taking place since the start of the year;
- expanding internationally, especially in countries with good economic prospects and poorly-developed recruitment sectors;
- expanding horizontally by adding new specialisms;
- diversifying the business mix to reduce volatility. Dimensions of the mix include different specialisms, industry sectors, public vs private and permanent vs temporary;
- using a common brand globally, and serving multinational clients internationally; and
- developing more joined up relationships with large companies, rather than one off "spot" contracts.
Valuation
| Company | Michael
Page | Hays | SThree | Robert
Walters |
|---|
| Market cap £m | 1,291 | 1,263 | 302 | 180 |
Share of net fees
from outside UK | 70.8% | 54.1% | 59.3% | 67.6% |
Share of net fees
from Asia/Pacific | 14.9% | 24.2% | 9.8% | 41.2% |
| Forward P/E | 27.7 | 28.9 | 22.4 | 25.9 |
| Dividend yield % | 2.0 | 6.4 | 4.7 | 2.0 |
These companies look expensive, but that is because they are at the bottom of the cycle. They should all benefit from global economic recovery, but I particularly like Robert Walters as a play on the Asia Pacific region.
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