Recruiters are a useful tell-tale of the business cycle, hence it is pertinent to consider this week’s updates for the June to September period from Robert Walters (LSE:RWA), PageGroup (LSE:PAGE) and Hays (LSE:HAS).
The first two recruiters especially, given their exposure to the US and, in Walters’ case China, work in major economies which, if they slow significantly, will affect all of us looking forward say six months.
Both profess “resilience in challenging markets” although numbers are decidedly down. Meanwhile, Hays simply cites a 7% like-for-like decline in net fee income.
In traditional terms, these are “white collar” recruiters, although it’s often hard these days to distinguish from “blue collar” – certainly for use as an economic indicator. Hospitality industry jobs for example might be front-line for cuts if consumer spending falters, then if a downturn gathers pace, it would be reflected in areas such as banking. Accounting and IT have aspects of “essential services” but also cyclicality of demand for staff.
The key performance indicator for recruiters is net fee income – or gross profit – rather than revenue, on which basis Walters has seen a 17% decline albeit 13% at constant currency (cc).
Not surprisingly at this stage, “contract and interim” recruitment is outperforming “permanent” as organisations focus on shorter-term solutions to hiring needs. This typifies economies softening and does not necessarily imply a downturn, although income from permanent recruitment has fallen by mid-teen percentages.
I believe it affirms how interest rate hikes are only now really starting to impact activity. The big question is whether profit warnings follow in due course, or if equities do not react too badly given optimists reckon interest rates have peaked.
Walters warns China and US are weakening
Dashing the assumption that Asia Pacific is meant to be relatively resilient, the region dropped 24%, or by 16% cc, to £41 million in context of £93 million net fee income for Walters overall in the quarter.
The Australia, New Zealand and Mainland China segment within Asia Pacific did most damage, while Japan, Thailand and South Korea rose slightly. It appears to support the sense of how economic strains in China – emanating from its property market and banks – are a key factor currently.
While the UK slid 13% to £15 million, Europe was only 3% softer at £29 million amid mixed performance. Belgium rose 22% and a new business in Italy by 56% (off a low base), while Germany eased 4%. The largest businesses in France, the Netherlands and Spain were down 5% to 10%.
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“Other International” – the Americas, South Africa and Middle East – fell 22% to £8 million with notable challenges in the US, especially across technology and financial services. Such industries can be key cyclical indicators, hence the reason I think it’s time to hold our breath for the world’s most significant economy. Otherwise, Latin America jumped 78% and South Africa by 74%, possibly small size aiding dynamics.
|Robert Walters - financial summary|
|Year-end 31 Dec||2015||2016||2017||2018||2019||2020||2021||2022|
|Turnover (£ million)||813||999||1,166||1,233||1,216||938||971||1,100|
|Operating margin (%)||2.8||2.6||3.6||4.0||4.2||1.6||5.6||5.3|
|Operating profit (£m)||23.1||26.2||41.9||49.7||51.2||14.8||54.1||58.2|
|Net profit (£m)||15.3||19.9||29.3||35.6||34.0||5.7||33.5||39.1|
|Reported earnings/share (p)||18.7||25.4||38.9||45.8||44.9||7.5||43.7||53.4|
|Normalised earnings/share (p)||19.3||26.0||39.5||46.2||45.0||8.9||43.0||53.8|
|Return on capital (%)||24.7||25.2||33.9||32.2||23.3||6.8||23.7||23.8|
|Operating cashflow/share (p)||19.3||37.6||42.4||80.8||92.3||131||43.9||52.0|
|Free cashflow/share (p)||12.0||31.2||33.1||72.7||79.7||118||26.7||30.3|
|Dividend per share (p)||7.1||8.5||12.0||14.7||4.5||15.5||20.4||23.5|
|Covered by earnings (x)||2.6||3.0||3.2||3.1||10.0||0.5||2.1||2.3|
|Net assets per share (p)||119||133||162||202||211||222||228||246|
Source: historic Company REFS and company accounts
As yet, full-year guidance remains unchanged – where consensus expects net profit down 63% below £15 million for earnings per share (EPS) of 29p – hence a forward price/earnings (PE) of 13 times and yield over 6%, with the stock currently around 370p.
But it is all about 2024 where consensus hopes for a near 50% rebound in EPS over 40p, based on £28 million net profit – in which scenario the PE would be 9.5 times. It’s unclear whether it exemplifies how forecasts may be optimistic generally about a “soft landing” then recovery in 2024.
If latest oil price strength feeds stagflation, then corporate profit downgrades look inevitable. Vladimir Putin declared last Wednesday cuts to oil supplies by Russia and Saudi Arabia – representing 1% of world demand – would continue despite fears the Israel/Hamas conflict alone could drive crude prices to $100 a barrel.
At least Walters’ initial 9% jump I share price to 387p after the update shows the market had been steeled for worse, hence an aspect of pricing in negativity.
Similar at PageGroup but adds downgrades profit
Net fee income fell a relatively modest 8% to £242 million cc, given less exposure to Asia Pacific than Walters. But there is similarity in the activities split, with temporary recruitment up 6% and permanent down 12%. Internal headcount slipped 4%.
While China is down 22%, of concern also is the US 25% lower – implying the setback at Walters was not company-specific.
Apart from the UK down 19%, Europe is relatively resilient despite mixed performance – Germany up 5% and France by 1%, although Southern Europe eased 5% and Benelux by 8%.
Net cash is up 42% to £136 million, which means not only an interim dividend but also continuation of special dividends – a total £66 million to be paid on 13 October. I would not view that as indicating confidence in prospects, rather that low capital expenditure needs (see table below) justify returns to shareholders.
|PageGroup - financial summary|
|Year end 31 Dec||2015||2016||2017||2018||2019||2020||2021||2022|
|Turnover (£ million)||1,065||1,196||1,372||1,550||1,654||1,305||1,644||1,990|
|Operating margin (%)||8.5||8.4||8.6||9.2||8.9||1.3||10.3||9.9|
|Net profit (£m)||66.2||72.1||83.1||104||103||-5.7||118||139|
|Reported earnings/share (p)||21.1||23.1||26.4||32.4||32.2||-1.8||37.0||43.5|
|Normalised earnings/share (p)||21.3||23.1||26.4||32.4||32.2||-1.7||37.0||44.5|
|Return on capital (%)||39.5||39.3||40.8||42.1||33.5||4.3||38.7||43.2|
|Operating cash flow/share (p)||26.3||28.4||27.4||28.3||48.9||42.9||46.7||57.9|
|Free cash flow/share (p)||21.5||20.3||20.8||20.3||40.7||35.8||36.8||40.0|
|Ordinary dividend per share (p)||11.5||12.0||12.5||13.1||13.7||0.0||15.0||15.7|
|Special dividend per share (p)||16.0||6.4||12.7||12.7||12.7||0.0||26.7||26.7|
|Covered by earnings (x)||0.8||1.3||1.0||1.3||1.2||0.0||0.9||1.0|
|Net assets per share (p)||68.0||75.6||82.6||97.0||98.7||96.1||103||107|
Source: historic Company REFS and company accounts
It is canny how dividend policy is split like this, enabling the special element to be dropped in challenging times instead of letting a cut in the ordinary dividend make bad news.
Profit is downgraded from last July’s reassurance of £137.6 million at the operating level, to a £125 million to £130 million range (excluding a £5 million exceptional charge for cost-cutting). Hence, a 6% initial drop in the stock versus Walters rising. A median £127.5 million operating profit would represent a 35% fall on last year’s £196 million.
White-collar salary levels remain elevated – showing how people in well-paid jobs may dodge much of the cost-of-living crisis and help sustain economic demand. Yet salary increases reduced against the third quarter of 2022.
There is less willingness to move jobs amid lower offers elsewhere. Page says: “Due to a slower end to the quarter, there is a heightened degree of uncertainty in the short term.”
A near 5% cut in headcount in the third quarter alone shows management battening down the hatches in context of a near 11% reduction year-on-year. The £5 million cost of achieving this is however projected to deliver annual savings of £20 million from 2024 onwards.
Like Walters, consensus expects some rebound in 2024 after a near 40% plunge in normalised EPS this year. If around 30p is indeed in prospect, 15 months’ forward, then at 414p the PE is near 14 times. Quite what might be the prospective yield is unclear, but even if the special dividend is axed, maintaining the ordinary would deliver near 4%.
Hays sees same in US and China, but all three rate ‘hold’
A 7% like-for-like slip in net fee income represents Hays’ first fiscal quarter. Numbers are in line with expectations, but mixed sentiment is shown in the stock rising 1% then closing down 1% at 102p.
Once again, the US is “notably tough,” down 28%, with China “again challenging” in context of Asia 17% lower.
A new CEO cites “key markets characterised by skill shortages and continue to be positively impacted by wage inflation.”
- ii view: recruiter Hays steady as it navigates tough markets
- Ian Cowie: why it’s never too soon to take a profit
On forecasts, it is another story of moderate slowdown – EPS 14% lower in the year to June 2024 – then hopes for a 25% rebound in 2024/25, on which basis EPS over 9p implies a PE of around 11 times. The yield would be 4.5%.
All three stocks look fairly priced to me and in a tricky situation to weigh prospects. The chief upshot is US and China weakness, which is liable to affect the global economy, and at the same time as oil prices are rising.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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