SThree rides jobs market recovery

When things go well for recruiters they go very well. Not only is there more work, the fees generated by that work rise and profitability increases rapidly. It's this dynamic that was behind SThree's 78 per cent constant-currency first-half pre-tax profit hike. And with the first-half conversion ratio - a key measure of profitability representing the percentage of gross profit converted into operating profit - coming in at 12.8 per cent compared with a pre-credit crunch peak of over 30 per cent, there's plenty more to go for. What's more, all SThree's markets, except for the small energy division, are performing well and the group has significant scope for expansion in the US. Prospects are also good for the its high-margin contracting business, which now accounts for two-thirds of gross profits, the rest coming from permanent placements.

SThree's focus on high-margin contract work is helping drive earnings momentum. In the group's most recent September trading update, management revealed that third-quarter year-on-year contract placements were up a fifth. Demand for contract workers has been particularly strong in continental Europe, which accounted for 43 per cent of third-quarter gross profit. Here, strict labour laws in France and Germany make temporary contracts more popular with employers.

However, it is in the US where SThree is focusing its growth efforts. The Americas, which currently account for 22 per cent of gross profit, has become the fastest-growing region for the recruiter and the US accounts for the vast majority of this. During the third quarter gross profit was up by 31 per cent. The group has grown its consultant and sales headcount in the region by 42 per cent over the past year and this is set to increase further still. Since the group specialises in ICT, life sciences and banking and finance, its expansion in the world's largest science, technology, engineering and mathematics (STEM) market offers serious potential. Once again, the group's bias towards contract placements, which are popular with employers looking for candidates to undertake project-based work in STEM markets, has worked to SThree's advantage.

The group's only recent black spot is its energy business which has been hit by the falling oil price and a consequent reduction in hiring. Management has responded fast by trimming consultant and sales headcount by more than half over the 12 months to the end of the third quarter. Third-quarter gross profit fell by 25 per cent overall, with permanent gross profits down by just over half while contract gross profits dropped 7 per cent year on year. This means the group now generates just 10 per cent of its gross profit from the energy sector, compared with 16 per cent at the same time the previous year. There are some signs of the negative trends abating, with the third quarter showing an improvement on the second quarter of the year.