Interactive Investor

Insider: buying at a firm with dividend appeal

30th May 2022 09:40

Graeme Evans from interactive investor

Recruiters are being hit by economic fears, but as the world of work changes this director sees the outlook differently. There’s also buying at three FTSE 100 stocks.

A long-serving Hays (LSE:HAS) director has backed the FTSE 250-listed company’s shares in the wake of the heavy selling seen across the recruitment sector.

The £20,000 purchase by a person connected to senior independent director Peter Williams took place on Wednesday at a price of 118p, some 25% below the level in early January.

Williams, who has been on the Hays board since February 2015, was last involved in a purchase of Hays shares in the early days of the Covid pandemic in April 2020.

His confidence is shared by broker Liberum, whose recruitment sector review last week gave Hays a “buy” recommendation and an improved price target of 155p. The shares closed last week at 123.3p.

Liberum’s other “buy” recommendations in the sector include Gattaca (LSE:GATC) and Robert Walters (LSE:RWA), while SThree (LSE:STEM) is the overall favourite due to its business model being seen as the best way to play the skills shortage theme. PageGroup (LSE:PAGE) is rated at “hold”.

After their outperformance in 2021, Liberum said this year’s significant weakness for recruitment shares suggested that the top of the cycle has already been called.

The broker said: “We think that there will be at least another quarter of strong news flow from the recruiters and that earnings risk beyond that is already being priced in, presenting an opportunity.”

It believes the best placed companies will be those in niche areas, such as at Hays where there’s been increased focus on growth sectors such as technology. 

Liberum said: “Cycles are contracting, but skills shortages are becoming more acute.

“Age demographics have led to a labour supply squeeze that is not going away and our work shows a profound mismatch between skills and jobs in STEM (science, technology, engineering, mathematics). Herein lies a material opportunity for focused recruiters.”

At a presentation to investors in London last month, Hays gave insight into how the pandemic has changed the world of work and created new challenges and opportunities for candidates and clients that it is well placed to meet.

Its ambitions include £500 million of technology fees by 2027, having grown this figure to £300 million at a market-beating compound annual rate of 9% between 2011 and 2022.

On inflation, it believes it can be a net winner as higher wages will boost permanent fees. Hays points out that each 1% increase in pricing drives an additional £12 million fees, whereas each 1% increase in its cost base is worth £9 million.

The City presentation highlighted the potential for significant shareholder returns of between £550 million and £750 million over the next five years, equivalent to about 37% of its current market cap. This forecast is based on the company’s ambitions to double profits and generate free cash flow of between £900 million and £1.1 billion.

The company, which trades with a forward dividend yield of 6%, told investors at February’s interim results to expect a substantial special dividend with August’s full-year results. A year-end trading update is due on 14 July.

Hays employs more than 12,000 staff in 255 offices worldwide and has been run by chief executive Alistair Cox since 2007.

In a note released after April’s investor day, UBS highlighted a target price of 220p and pointed out that Hays was on a gross profit multiple at the bottom-end of the normal through-cycle range of 1.5 times to 2.5 times.

The bank added: “Macroeconomic uncertainty remains high, but at this level any future growth prospects - never mind doubling profits - are severely discounted.”

FTSE 100 trio

Board members at FTSE 100-listed SSE (LSE:SSE), Whitbread (LSE:WTB) and RS Group (LSE:RS1) have shown support for their respective companies by picking up shares at recently reduced prices.

The SSE purchase by non-executive Dame Angela Strank took place on Wednesday, when the renewables giant was trading lower on fears of a windfall tax on power generators.

Her £9,000 purchase was made at 1,848p, but the stock closed the week at 1,752.5p compared with 1,912.5p last Monday after the chancellor said he was minded to introduce a levy.

The £20,850 Whitbread purchase by its non-executive director Fumbi Chima took place on Tuesday at a price of 2,642p, which compares with 3,243p for the Premier Inn owner in February and 2,996p in April. The stock closed last week at 2,730p.

At RS Group, which used to be known as Electrocomponents, its non-executive director Alex Baldock bought shares on Wednesday worth £18,800 at a price of 839.5p. The components supplier finished the week at 932.5p but had been at 1,047p earlier this month and 1,236p at the start of the year.

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