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Hays rides upgrade cycle

An expectation-beating third quarter for Hays had continued a trend in broker forecasts upgrades that should help continue to power the recruiter's shares
April 20, 2017

Recruiter Hays (HAS) delighted the market earlier this month when it reported better than forecast third-quarter trading, including quarterly net fee income (NFI) at an all-time high, driven by a strong performance from its international operations, which account for three-quarters of the total. The company, which has its fortunes firmly tied to economic health, grew net fee income by 10 per cent in like-for like terms during the three months, or 8 per cent after adjusting for an increase in the number of working days in the period. This led to a fresh round of broker forecast upgrades, which is a trend (see chart below) that we think has further to run given recent encouraging data on the strength of the global economy and signs that the UK job market may be bottoming.

IC TIP: Buy at 170p
Tip style
Growth
Risk rating
Low
Timescale
Medium Term
Bull points
  • Record net fee performance
  • Strong cash position
  • Broker forecast upgrades
  • Special dividend potential
Bear points
  • UK business still struggling
  • Small drop in conversion rate

 

Hays post-Brexit forecast EPS upgrades

  

The market had been prepped for good news by a trading update from rival Robert Walters (RWA), which showed strong performance in Australia. Investors' assumptions that a benign environment in the country would also benefit Hays were borne out, as it grew Australian net fee income (NFI) by 16 per cent, with IT the star performer. In all, the Asia Pacific region saw a 12 per cent increase in like-for-like NFI, while the half of the business classified as "Continental Europe and the rest of the world" experienced 18 per cent like-for-like growth. This is particularly encouraging given management's recent investment in headcount in Europe.

The UK business has had a tougher time, but the 4 per cent fall in NFI marked a noteworthy improvement on the 10 per cent decline reported at the half-year stage. The slow UK jobs market has been attributed to vacancies being put on hold in the wake of the referendum and management said the first signs of recovery were beginning to appear. Indeed, fees from the private sector, which accounts for three-quarters of UK income, were off just 1 per cent. The public sector continues to feel the pain of the "tougher part of austerity", though, and was off 13 per cent.

 

 

The strong performance is helping bolster Hays' coffers, too. The company had net cash of £40m at the end of March compared with net debt of £45.7m at the same point in 2016. The rising cash pile brings the prospect of increased income from the shares. The company thinks net cash could reach £100m by the end of the full year and the group has a policy of paying out special dividends when cash goes above £50m. This is expected to lead to a substantial increase in the dividend, making the yield on the shares equivalent to about 4 per cent. And while the broker forecasts used in our table are not pencilling in a repeat, if cash generation holds up there are grounds to think there could be more special payouts beyond 2017.

In a sign of the group's confidence in its markets, headcount has continued to increase steadily, up 8 per cent year on year at the end of March. Plans are in place for a further 2 per cent increase, focused primarily on Germany, France and parts of the Australian business. The conversion rate (a key measure of profitability for recruiters comparing operating profit with NFI) remains ahead of peers despite having fallen back slightly to 21.5 per cent from a high of 22.3 per cent.

HAYS (HAS)

ORD PRICE:170pMARKET VALUE:£2.5bn
TOUCH:169.9-170p12-MONTH HIGH:172pLOW: 91p
FORWARD DIVIDEND YIELD:2%FORWARD PE RATIO:17
NET ASSET VALUE:35p*NET CASH:£40m

Year to 30 JunNet Fee Income (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20140.731326.02.6
20150.761567.32.8
20160.811738.42.9
2017**0.952039.56.6
2018**1.0121610.23.4
% change+6+6+7-48

Normal market size: 15,000

Matched bargain trading

Beta: 0.7

*Includes £243.7m in intangible assets, or 17p a share

**Numis forecasts, adjusted EPS and PTP figures