If you haven't heard already, the UK economy is improving sharply. According to the Office for National Statistics, the UK economy grew by 0.7 per cent in the final quarter of 2013 alone, with business investment increasing an impressive 2.4 per cent during the same period. This is encouraging news for investors in UK-focused businesses, reflecting rising confidence in the private sector and a greater willingness by companies to start expanding again following several years of curtailed activity.
- Cheap UK recovery play
- Focus on fast-growing IT sector
- Growing earnings rapidly
- Restructuring has trimmed cost base
- Rising debt
- Thinly traded
The recruitment sector in particular stands to be a major beneficiary of Britain's economic revival. And shares in InterQuest (ITQ), a small specialist recruitment agency focused on the fast-growing British IT sector, look an excellent way to play the economic recovery theme.
While many larger, diversified recruiters are seeing earnings dragged down by tough conditions in Europe and elsewhere, InterQuest is now fully focused on the UK and, importantly, is already showing signs of growth. Net fee income (revenues excluding passed-on wage payments) rose by 6 per cent in 2013 and is forecast to jump by a quarter this year.
INTERQUEST (ITQ) | ||||
|---|---|---|---|---|
| ORD PRICE: | 105p | MARKET VALUE: | £36m | |
| TOUCH: | 104-106p | 12-MONTH HIGH: | 105p | LOW: 60p |
| FORWARD DIVIDEND YIELD: | 2.9% | FORWARD PE RATIO: | 10 | |
| NET ASSET VALUE: | 60p* | NET DEBT: | 44% | |
| Year to 31 Dec | Net fee income (£m) | Pre-tax profit** (£m) | Earnings per share** (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 16.6 | 3.5 | 10.5 | 2.50 |
| 2012 | 16.3 | 1.5 | 3.4 | 2.50 |
| 2013 | 17.4 | 2.3 | 4.6 | 2.55 |
| 2014** | 22.2 | 3.8 | 8.2 | 2.81 |
| 2015** | 24.5 | 4.7 | 10.5 | 3.09 |
| % change | +10 | +24 | +28 | +10 |
Normal market size: 1,000 Market makers: 4 Beta: 0.84 *Includes intangible assets of £20.6m, or 60p a share **Charles Stanley adjusted figures and forecasts | ||||
The company is not merely relying on macroeconomic tailwinds to improve performance, however. InterQuest completed a restructuring in 2012, reducing headcount and cutting overheads by relocating its head office. It also refocused the business on the higher-value-end of the IT market and introduced a range of incremental self-help measures, such as placing more focus on cross-selling and improving customer retention. Moreover, InterQuest completed a major acquisition in November for £5.6m plus a £1.3m "earn-out", adding a leading digital recruitment business to the fold. In December, management decided to dump a small, loss-making office in Singapore.
When all of these changes are taken into account, analysts from Charles Stanley expect cash profits to rise by nearly 60 per cent in 2014, about half of which is organic and the rest stemming from the acquisition. This looks achievable, given cash profits rose two-fifths last year, when the UK economy grew at a rate of 1.7 per cent per year. The International Monetary Fund expects 2.9 per cent growth in 2014.
True, InterQuest's net debt position has ballooned to £9m from £4.4m a year ago thanks to its acquisition. But this hardly looks stretched based on InterQuest's cash flows and its £15m debt facility should give it ample breathing room.
