Recruiters feel the chill of Covid-19

The hope of an improved outlook in 2020 now seems a distant memory as the 'corona crunch' deepens

April 14, 2020

Rewind three months and the biggest issues keeping the recruiters up at night were US-China trade tensions and lingering Brexit uncertainty in the UK. These things “now seem like a lifetime ago”, says Robert Walters, chief executive of the eponymous recruitment company. The Covid-19 pandemic has brought the jobs market to a near standstill. Company updates across all sectors contain some variation of the words “hiring freeze”. Even the recruiters themselves have stopped taking on new staff and are trimming their headcounts to manage their cost bases.

Unprecedented disruption

“The past few weeks have been unlike anything the world has seen in modern times”, says Alistair Cox, chief executive of Hays (HAS). Since 13 March, his company has seen a “very material deceleration” in client and candidate activity. The group is forecasting a “substantial” impact on earnings, guiding that operating profit for the year to 30 June will likely be “materially below” consensus analysts’ expectations of £190m.

Hays has modelled a “stressed scenario” that would be worse than the last recession when net fee income (also known as gross profit) plunged by 40 per cent from peak to trough over a 9-month period. Under this hypothetical, there would be a sharp 70 per cent year-on-year decline in net fee income over a 4-month lockdown period, softening to a 35 per cent drop by the end of December. The group would move from £35m of net cash to “material levels of residual debt”.

To avoid stretching the balance sheet, it recently tapped institutional shareholders for £200m through a placing, taking advantage of new guidance which lifted the threshold for new share issuances from 10 per cent of the issued share capital to 20 per cent.

Broker Jefferies sees PageGroup (PAGE) as an “unlikely candidate” to issue equity given it was sitting on £83m of net cash as at 31 March. Similarly, Robert Walters (RWA) has £110m of net cash, up from £85.8m at the year-end, and Mr Walters sees “no need to go to the markets or place cash in any other form”.

That doesn’t mean either group hasn’t suffered under the pandemic. Page’s net fee income fell 11.7 per cent at constant currencies to £182m in the first quarter of 2020, a significant acceleration from the 0.4 per cent decline in final three months of 2019. This was led by a 34 per cent plunge in Greater China, one of its ‘large, high potential’ markets. Meanwhile, Robert Walter’s net fee income dropped 11 per cent to £87.4m in the three months to 31 March.

The worst is yet to come

While China is ahead of the pack, lockdown measures across other countries began in earnest in March. Usually one of Page’s biggest months, net fee income plunged by over a quarter. Robert Walters’ European net fee income dipped by just 2 per cent at constant currencies to £25.4m in the first three month of the year, but further pain is likely ahead.

The French and German economies were already subdued amid gilet jaunes protests and US-China trade war disruption. Now, Germany’s economic output is forecasted to shrink by 9.8 per cent in the second quarter – more than double the largest drop during the global financial crisis – and 4.2 per cent for the full year. The Banque de France has warned the shutdown is knocking 1.5 percentage points off of French economic growth for every two weeks it continues.

With Robert Walters’ UK quarterly net fee income crashing by 29 per cent, the impact of Brexit uncertainty on the domestic picture now seems trivial. The latest KPMG and Recruitment and Employment Confederation (REC) report on the jobs market found that demand for permanent and temporary workers fell for the first time since 2009 in March as businesses cancelled or postponed hiring. Gross domestic product (GDP) growth prior to the pandemic was already weak at 0.1 per cent in the three months to February. Ernst & Young’s ITEM Club is now expecting GDP to contract by 6.8 per cent in 2020 and projects the economy will not return to the size it was at the end of 2019 until 2023.

Where to from here?

As countries contemplate relaxing lockdown restrictions, it might be tempting to jump aboard the tentative recoveries we’re seeing in the recruiters’ shares. But there is a significant risk of a ‘second wave’ of infections. It will also be some time before economies reclaim a clean bill of health (see chart) and that will weigh on business sentiment, the make-or-break factor for recruitment. Even science, technology, engineering and mathematics specialist SThree (STEM) is unlikely to be immune. As near-term uncertainty abounds, we’re sticking to our hold recommendations across the board.