Hays fails to impress, but could have been worse

by Graeme Evans from interactive investor |

This update was no worse than most in the City expected after last week's statements from rivals. 

The prospect of a bigger special dividend at Hays (LSE:HAS) did little to ease recruitment sector jitters today as another update highlighted the impact of economic and political uncertainty.

Hays recorded underlying growth in net fees of 1% for the fourth quarter to June 30, compared with the 3% consensus forecast and lower than the previous period's 5% improvement.

Shares dipped 3% to 146p at one point today, even though Hays pleased some analysts with a record year-end cash balance of £130 million. This means it is in a position to consider a boost to shareholder returns, with analysts at Jefferies now forecasting a 5.5p special divi alongside August's annual results. Last year, Hays paid a 5p special totalling £72.9 million.

Source: TradingView Past performance is not a guide to future performance

The mixed performance mirrors last week's update from FTSE 250 index rival PageGroup (LSE:PAGE), whose shares crashed 15% after it said it expected operating profits to be at the lower end of market forecasts. As with Hays, Page is still forecast to pay another special dividend later this year as cash balances continue to improve at this stage of the economic cycle.

The concern for investors in the sector is that headwinds appear to be strengthening, particularly in the UK and Ireland after underlying net fees fell 1% in Hays' fourth quarter. This “more subdued” performance compared with solid growth of 2% in the previous three months.

The largest UK region of London was down by 2%, while the North of England and Scotland fell 12% and 7% respectively. South West & Wales and East of England rose 8% and 3%.

Growth in public sector business was robust at 7%, but this was offset by a 6% net fees decline for the private sector, which generates around 75% of UK and Ireland business. IT was the strongest specialism, while education continues to be impacted by tough market conditions.

The Australia and New Zealand division was also down, with mixed market conditions and tough year-on-year comparisons compounded by disruption caused by the run-up to Australia's general election in May.

In the company's biggest market of Germany, where Hays generates 25% of its business, underlying growth was up by a 4%. This was despite broad signs of client cost control and slower decision-making, particularly in the manufacturing and automotive sectors.

Overall, Hays says it is on course to deliver 2018/19 operating profits in line with market forecasts at around £248 million.

Robert Walters reported an 8% drop in gross profit for the UK last week, but this was offset by a strong performance overseas. As well as declining client confidence, the political turmoil in the UK has meant potential recruits are becoming much more wary about moving.

Today, Jefferies downgraded its earnings per share forecast for Hays' 2020 financial year by 5% to 11.80p to accommodate more conservative net fee growth projections. The broker has a price target of 165p, based on a forward price/earnings (PE) multiple of 12.8x. Its base case is for a special dividend of 6.5p a share in the 2020 financial year, giving a projected yield of 7%.

Analysts at HSBC said today's update was no worse than most in the City would have expected after last week's statements from Page and Robert Walters. 

HSBC said the commentary was consistent with Page as slower decision-making impacted Q4, implying the time taken to hire has expanded and pointing to a slowdown in manufacturing and automotive sectors rather than a slide into a broad labour market recession.

They added:

"How much this is client demand slowing and how much candidate sourcing slowing (the balance will differ between manufacturing clients and service sector clients and by geography) is worth exploring."

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

get more news and expert articles direct to your inbox
Sign up for a free research account and get the latest news and discussion, and create your own Virtual Portfolio