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Ride Walters' earnings upgrade cycle

Investors should take note of recruiter Robert Walters' record of rising net fee income and potential for significant profit growth.
January 15, 2015

A fourth-quarter trading update from recruiter Robert Walters (RWA) once again left brokers scrambling to upgrade their EPS forecasts, and we think there could be much more to come in 2015. Indeed, the scope for substantial earnings upside from Walters is illustrated by the fact that at the half-year stage the company was converting just 5.3 per cent of net fee income (NFI, revenue less passed-on wages) into operating profit compared with a conversion rate of over 20 per cent before the credit crunch. And while concerns remain about the global economic outlook, nine straight quarters of NFI growth and positive comments from Walters' industry peers give us confidence in the cyclical growth story.

IC TIP: Buy at 322p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Nine consecutive quarters of growth
  • String of EPS forecast upgrades
  • Potential for expansion in US and Asia
  • Net cash
Bear points
  • Weak euro
  • High PE ratio

Walters reported growth across all regions in its fourth-quarter results, while NFI was up 17 per cent on a year-on-year basis. Following three earnings-forecast upgrades in 2014, the fourth-quarter figures prompted broker Numis to upgrade its pre-tax profit forecast by 10 per cent for the financial year just ended and 7 per cent for the recently started one. Investec penned in upgrades of a similar magnitude.

 

 

Walters' improving fortunes have been particularly pronounced in the UK. Over the past year, NFI has climbed an impressive 27 per cent. Management has attributed this to a return in confidence, which is prompting more people to switch jobs. The financial services sector, which has spent a long time in the doldrums, in particular is experiencing renewed buoyancy.

The group is also reaping the rewards of investing and expanding across all corners of the globe during the downturn, having almost doubled headcount over the past five years. The recruiter is looking to Asia Pacific in particular to carry on this expansion. It already has well-established businesses in Singapore, Japan and Malaysia, as well as in emerging markets such as Thailand and Vietnam. This segment delivered healthy 11 per cent NFI growth during the fourth quarter. A growing demand for bilingual candidates in Japan is proving particularly beneficial to the group's profits in the region.

The group, which has net cash, intends to open further offices this year. Locations are decided upon based on sites identified by its regional offices. Management said its Indonesian office is particularly ripe for expansion, while Latin American countries including Chile and Peru also boast strong opportunities for the group.

Admittedly, the recruiter has had to deal with the negative side-effects of a weak euro, but on a constant currency basis NFI growth was an impressive 13 per cent in the region during the fourth quarter. Its Australian business - which had suffered as a result of a slowdown in the country's mining industry - has also started to stabilise. It posted 1 per cent fee growth.

ROBERT WALTERS (RWA)

ORD PRICE:322pMARKET VALUE:£248m
TOUCH:318-323p12M HIGH / LOW:363p270p
Forward DIVIDEND YIELD:1.9%Forward PE RATIO:21
NET ASSET VALUE:98pNET CASH:£14m

Year to 31 DecNet fee income (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201118315.112.75.2
20121887.76.25.2
201319910.17.75.4
2014 *21517.513.45.8
2015 *23919.515.46.2
% change+11+11+15+7

Normal market size:750

Matched bargain trading

Beta:0.4

*Investec Securities forecasts