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Recruiters: This is not 2008

Sector Focus

Recruiters: This is not 2008

Following the vote to leave the European Union, it seems investors initially turned their backs on London-listed recruiters, assuming the cyclical nature of their businesses would make them among the hardest hit by the predicted decline in - for example - London's diminished appeal as a financial centre. But those anticipating a return to the woes the sector faced in 2008 as the global financial crisis hit appear to be off base.

True, as we've said before, the performance of UK-listed recruiters has been mixed since the referendum vote, with some continuing on while others struggled to allay fears that the sector would be damaged by a drop in client confidence. It's often the case that recruiters are used as indicators of the wider economic picture, as increased willingness among individuals and businesses to seek jobs or hire new workers reflects, at least in part, general confidence in the economy going forward.


Hungry hungry hirers

But some surprisingly robust performances may give investors a confidence boost. One such example is Robert Walters (RWA), which reported first-quarter growth of 27 per cent in the UK, led in part by the contribution of financial services in London. That's not all - the company concluded that the period was a "record quarter", with net fee income up by a fifth. It outperformed close rivals such as Hays (HAS) and PageGroup (MPI), where UK-based revenues struggled to show positive growth, despite good international numbers.

However, research by the Recruitment and Employment Confederation (REC) suggests trouble may lie ahead. The REC's most recent report on jobs, a monthly analysis of the UK labour market, warned that while demand for staff is growing in all sectors and regions of the UK, the number of candidates available to fill those vacancies is at a 16-month low. That might sound bad but, in actual fact, the decrease in hiring activity following the referendum doesn't come close to matching the decline seen in the wake of the financial crisis.

Tom Hadley, director of policy for the REC, notes that while some of the shortages preceded the referendum, especially in areas such as engineering and healthcare, the situation had been exacerbated by the decreased flow of candidates from Europe due to uncertainty over future immigration policy. He gave the example of a confederation member who recruited nurses and had seen an 80 per cent decrease in available candidates since the referendum.



Despite this, he said the situation was not as dire as in 2008. Demand for staff is "strong at the moment", he says, adding that companies are showing increased willingness to adapt or to engage with the government to encourage a progressive immigration policy. Analysts agree, with some noting that the 2008 global financial crisis marked an 'across the board' collapse in confidence, whereas the current situation has less uncertainty and isn't as global and wide-reaching in nature.


Lessons learned

Speaking to some of the companies themselves, it's clear that conventional wisdom is to diversify across a range of geographies, disciplines and between temporary and permanent recruitment. Temporary hiring is typically more resilient than permanent contracts, as delays to hiring decisions often lead to the hiring of contractors on a shorter-term basis, allowing the employer to cut their losses if conditions worsen.

Kelvin Stagg, chief financial officer of PageGroup, said the group's response to the risk of turbulence in the wider markets has been to diversify "both geographically and into new specialist disciplines". Management has also chosen to grow the Page Personnel business, given its larger exposure to a more resilient temporary recruitment market.

This was echoed by Alan Bannatyne, chief financial officer at Robert Walters. He said the company had realised the importance of maintaining a blend of temporary and permanent work following economic troubles in the early 1990s. Alongside this, he highlighted the need to keep cash on the balance sheet where possible. In his words, it's "the worst thing" to be under cash pressure when your workforce has shrunk by 10-15 per cent.

The 2008 global financial crisis marked an 'across the board' collapse in confidence, whereas the current situation has less uncertainty and isn't as global and wide-reaching in nature”



As with portfolio construction, recruiters tend to do better when they are spread across a range of geographies and sectors, allowing parts of the business to pick up the slack when others are hit by more negative market conditions. In addition, not being overly reliant on permanent recruitment is likely to make a company more flexible to change: temporary contracts are often used as a halfway measure when budgets come under pressure or commitment to hiring someone on a permanent basis starts to wane. Cash flows from temporary contracts are often also spread out across the length of the contract, providing a more steady - not to mention visible - stream of income for the recruiter.

UK companies have learnt the lessons of previous economic shocks well, and the vast majority now look to incorporate work from across these different divisions as a buffer. But UK operations are still important for most of these businesses, and if the candidate shortages that are beginning to emerge continue they'll suffer as a result. Some are using client contracts - where a client will commit to a minimum level of spending - to help guarantee revenue, while both Robert Walters and Hays have resource solutions businesses. These are essentially outsourced human resources departments for certain recruitment processes and may prove more resilient in a downturn given their specialist nature.

But the maturity of many of the recruitment businesses in the UK market means it would be a mistake to avoid the sector altogether when it looks like there are difficult times ahead. By focusing on the company's underlying mix of businesses alongside more traditional methods, there is plenty of value to be found.



Two UK-listed recruiters we like the look of are Hays and Empresaria (EMR). On the face of it, they appear totally different, but both have a wide range of business areas and geographies that are likely to protect them from most broad market shocks. Hays has the advantage of being the largest of the UK-listed recruiters, and last month surprised the market by reporting record net fee income. Empresaria is one of the smaller players in the market, and has grown via the acquisition of small, specialised companies. This has enabled it to report five consecutive years of double-digit growth in adjusted earnings per share, as well as 14 consecutive quarters of net fee income growth. The shares' forward earnings rating of just 10 isn't overly demanding in our eyes.


We have written favourably about Gattaca (GATC) - formerly known as MatchTech - recently. It's making good progress against it's goals of international diversification and is trading cheaply against its peers. Not unlike its rivals, it has also made use of a market ripe for consolidation. But it's still heavily focused on the UK market and, as a result, the share price has performed poorly since the referendum. It's the generous dividend yield that catches the eye, but don't allow that to overshadow the potential added risk here.


The broker's view:

Unfortunately, Gordon Brown was wrong when he predicted the end to "boom and bust". Not long after this claim, the developed world endured one of the worst recessions for a century. Most staffing businesses are inherently cyclical in nature. Many of their fortunes reflect the underlying movements of the macroeconomic environment they operate in. Therefore, when the financial crisis hit in 2007-10, net fee income plummeted. As an illustration, PageGroup's quarterly fees peaked at £152m by the second quarter in 2008 and had collapsed to £82m by the third quarter in 2009.

But over the past two decades the staffing sector has materially diversified, de-risking their business models.

While underlying economies will continue to be cyclical, there are always industry verticals providing non-cyclical growth. Areas such as digital transformation and cyber security are currently providing significant opportunities. Moreover, the evolving nature of technology creates skill shortages. Employers struggle to find key talent and so turn to specialist recruiters. InterQuest (ITQ) and Harvey Nash (HVN) are probably the two most pure technology recruitment plays on the London market. Their consultants have a solid understanding of the specialist industries they are placing candidates into. As a consequence, they are able to help source "hard-to-find" candidates and so charge handsome fees.

However, Staffline (STAF) is probably the least cyclical agency on the London market. Its on-site division places blue-collar temp workers into manufacturing, food proportion and distribution industries. While these clients are cyclical, Staffline has grown through recessions. It wins work by providing a flexible workforce and rigorous compliance and removing two major client headaches. Through acquisitions, Staffline has created the UK's most significant 'Work Programme' provider. Through a series of long-term contracts, the UK government pays Staffline to help disadvantaged individuals get back into work.

Therefore, while recruitment will always be cyclical, there are clearly ways of investing in less cyclical business models. Indeed, as the staffing sector evolves, we anticipate that innovation will continue.

Adrian Kearsey is an analyst at Panmure Gordon

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By Tom Dines,
18 May 2017

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