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Recruitment's day of reckoning

Created:
19 June 2008
Written by:
Algy Hall

The recruitment industry has put on a brave face since the market began marking down share prices last summer in the wake of the credit crunch, but a warning by Hydrogen group and negative industry data suggests cracks are finally beginning to show.

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Hydrogen's shares dropped 27 per cent after the company said that first-half trading was unlikely to match last year's figure. But there are special circumstances surrounding the warning. For one thing, the group generates a fifth of its business from the hard-pressed investment banking market. "If the market had seen anything coming, it should have been that one," says Seymour Pierce analyst Kevin Lapwood. What's more, until recently management's attention has been focused on a lengthy and ultimately unsuccessful bid battle for Imprint.

Elsewhere, investors in the recruitment sector can take some comfort from a strong trading update this week from SThree.

But there are still signs that the problems in the job market could be about to get much worse and spread beyond the City. The recruitment industry's widely-followed Report on Jobs for May pointed to another contraction in permanent placements and slowing demand for both permanent jobs and the hitherto strong temporary market. And the highly important service sector registered its first contraction for five years in May.

Broker Investec reckons there could be much worse to come for the UK's recruiters, pointing out that share prices fell by between 80 and 90 per cent from the top of the last cycle in October 2000 to the bottom in February 2003. That compares with a weighted average fall by the UK's three largest recruitment firms of 51 per cent from their peaks so far.

Optimists argue that the downturn may not be as harsh as last time. The job market has been very tight over recent years, suggesting there may be less slack and companies are increasingly internationalised, though a global downturn cannot be ruled out, either.

IC VIEW:

HighEnough

Given the worsening economic outlook, we're cautious on the highly-cyclical recruitment sector as a whole, but especially those companies that are predominantly exposed to the US and UK, and those with high levels of debt. Following its warning, Hydrogen’s shares are high enough at 138p.

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