FTSE 250 recruitment company Hays (LSE: HAS) looks like a decent business to me. One of the positives is the firm’s net cash position on the balance sheet.
In today’s second-quarter trading update, the company said it had £380m of net cash on 31 December 2020, up from just over £13m a year earlier. And the directors reckon cash collection from clients has “remained strong”, despite the ravages of the pandemic.
However, the company raised a gross £200m in a placing last spring to make sure it could survive the Covid-19 crisis. And there’s no doubt its international operations have been hit hard by the pandemic.
Revenues well down and shares up
Today’s numbers revealed the ongoing carnage. Overall fees dropped by 19% in the second quarter of the firm’s trading year following a 29% plunge in the first quarter. But the directors reckon revenue trends “improved through the quarter”. But that optimistic note comes with a warning. It’s “too early” to know how the new UK and European lockdowns will affect trading in the second half of the trading year.
But chief executive Alistair Cox is optimistic about the outlook. He’s “confident” Hays will increase its market share “as clients and candidates look for our expert recruitment guidance, both during and after Covid”.
And he’s not the only one with optimistic expectations. At 146p, the share price has risen by around 37% since the beginning of November. As ever, investors in the stock market seem to be buying shares like Hays in anticipation of better trading before it’s happened. And I can see the logic because there could well be a scramble to recruit people in all kinds of industries once the world is free of the curse of Covid.
Earnings set to rebound
Meanwhile, City analysts following the company expect earnings to come in near 5.8p for the trading year to June 2022. And that’s a vast improvement on the 2.1p or so they expect in the current trading year. But it’s still a long way from the earnings of just above 12p the company posted for 2019, before the crisis. So, the potential for a big recovery in earnings exists when things finally get back to ‘normal’.
On balance, I find the stock to be less attractive than the underlying business right now. At the current share price, the forward-looking earnings multiple runs near 25. And even if those earnings do fully recover and double further down the road, the multiple will still be as high as 12. Although the valuation drops a little if I adjust for the cash pile, it still looks full to me.
And if I can’t find a way to categorise Hays as a cheap share, the upside potential is probably less attractive than it was just over two months ago when the shares were lower. Meanwhile, the business faces near-term uncertainties. So, I’m inclined to avoid the stock for the time being in favour of other stocks in the FTSE 250.
