Is recruiter Hays a buy at 2016 prices?

Better profits and a special dividend have not prevented selling of Hays shares after annual results. 

More evidence of weakening market conditions put Hays shares on the back foot today, despite solid full-year profits and a bigger special dividend fuelled by strong cash generation.

The latest one-off payment of 5.43p brings to £265 million the amount in core and special dividends awarded by Hays in the first two years of a five-year plan to 2022.

Chief executive Alistair Cox said the shareholder rewards reflected the benefits of the company's "highly diversified business", with 19 countries still able to deliver trading records and offset weaker conditions in some key markets.

Worryingly for investor confidence, however, Hays (LSE:HAS) said trading over the summer showed market activity softening in the UK and Ireland. There was also evidence of reduced business confidence and slower client investment decision-making in the company's biggest market of Germany, particularly in the engineering and automotive sectors.

The two regions together accounted for more than half the company's operating profits in the year to June 30. Australia & New Zealand market activity continues to be broadly stable at high overall levels, while conditions remain good across Asia. Overall, full-year operating profits rose 4% on a like-for-like basis to £248.8 million, which was slightly stronger than expected.

Analysts at Jefferies said Hays had done a good job navigating the "tightrope of balancing short-term profit with medium-term investment" despite the material deceleration in revenue momentum.

The broker is now forecasting a 2% decline in working day adjusted net fees for the first quarter of the new financial year, rather than its previous estimate for no change. This will be driven by a 6% decline in the UK and Germany down 2%.

The weaker fee outlook and its forecast of higher property and depreciation costs means Jefferies has downgraded its earnings per share forecast for 2020 by 7%. It also reduced its price target to 145p from 165p, which is based on a projected 2020 price/earnings (PE) multiple of 13.1x.

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

Hays shares were a penny lower at 138p today, having fallen to 132p in the opening minutes of trading - a price not seen since November 2016 - after the full-year results fuelled worries that headwinds in the sector appear to be strengthening. The stock had been trading above 200p this time last year.

Shares in FTSE 250 index rival PageGroup (LSE:PAGE) shares have also fallen sharply after it said in July that it expected operating profits to be at the lower end of market forecasts. As with Hays, Page is still paying special dividends as cash balances continue to improve at this stage of the economic cycle.

Having finished the year with record year-end cash of £129.6 million, Hays has announced total dividends worth £138 million for the 2019 financial year, including £80 million for the third special dividend it has paid in recent years.

Cox said the focus going forward was on driving consultant productivity and making selective investments in key markets to reinforce the company's market leadership. He added:

"I am confident we will continue to appropriately balance our long-term potential with the more challenging markets we currently face."