Buy Hays for UK cyclical upswing

Hays responded by cutting the UK division's cost base by more than 30 per cent from peak levels with its office network down to 102 offices versus a peak of 235. The latest set of results revealed the fruit of the cost cutting. The UK operations were back in the black, making an operating profit of £6m in the year to June. But when you consider that is almost 23 times smaller than the profit the business made in 2008, you see just how sizable the potential for recovery is.

Looking at it another way, as at the end of June Hays had 1,024 recruitment consultants in Asia Pacific who generated £67m of operating profit last year. In the UK, it had almost double the number of recruitment consultants generating less than a tenth of the profit. Getting those UK recruitment consultants busy does of course rely on the UK economy continuing to deliver good news. But the most recent indications are promising. Unveiling his Autumn Statement, chancellor George Osborne raised forecast GDP growth for 2013 to 1.4 per cent, that is a substantial upward shift from the 0.6 per cent flagged up by the Office of Budget Responsibility in the spring. Government forecasts for 2014 GDP growth were also lifted to 2.4 per cent from 1.8 per cent.

The signs are that the better economic news is feeding through into Hays' numbers. A trading update in October said that UK net fees grew by 8 per cent in the first quarter of the current financial year (the three months to end-September) with a broad based pick-up across most regions and specialisms. That was a big turnaround from the 1 per cent drop in UK net fee growth in the previous financial year, and helped Hays deliver group net fee growth in excess of City consensus expectations for the second consecutive quarter.

Another encouraging trend was the recovery in higher-margin UK permanent (or perm in recruitment speak), as opposed to the temporary. The perm segment was particularly hard hit by the economic slowdown as employers did not have the confidence to make long-term hires. Hays' UK perm fees fell 7 per cent last year, but in the first quarter of its current financial year, they were up 9 per cent in a sign that confidence is returning. To put into context what a decent recovery in its UK division would mean for the group, the profit made by the UK business in 2008 was more than the profit made by the entire group last year.

Alongside a brightening picture in the UK, many of Hays' other markets also appear to be heading in the right direction. Continental Europe and Rest of World is currently Hays' largest division, making up about 40 per cent of group net fees. Two out of three months in the first quarter of the current financial year have been record months for this division. Hays also reports further improvement in Asia during the first quarter with notably strong performances in Hong Kong, Malaysia and Singapore.

Australia, which makes up about a fifth of group net fees, has been tougher as a slowdown in resources and mining recruitment bites. Net fees for this division dropped 18 per cent in the first quarter. But the core business in New South Wales and Victoria showed signs of stabilising with net fees at similar levels to the preceding quarter.