SThree outperforms rivals thanks to STEM focus

Even before Covid-19 started its march across the globe, the listed recruiters were already facing a challenging hiring landscape. There were ongoing US-China trade war tensions, Brexit and election uncertainty in the UK, gilets jaunes strikes in France, anti-government protests in Hong Kong and bushfires in Australia. It was hard to imagine that things could get any worse.

But with the pandemic putting the brakes on hiring activity, the likes of Robert Walters (RWA), PageGroup (PAGE) and Hays (HAS) are continuing to see double-digit declines in their net fee income – also known as gross profit.

Trading updates covering the final three months of 2020 indicate that Robert Walters is being squeezed the most – its net fee income for the three months to 31 December tumbled by over a quarter year-on-year at constant currencies, to £71m. This was, however, a slight improvement from the third quarter when its net fees declined by 30 per cent. Still, the fourth quarter performance was better than it had anticipated, and as such, the group is guiding that its 2020 profits will be ahead of market expectations.

Meanwhile, Page saw its net fee income fall by just over a fifth at constant currencies to £166m. On the back of regional Covid lockdowns and Brexit uncertainty, the UK was the hardest hit region, with the pandemic causing subdued demand for clerical staff in particular. While chief executive Steve Ingham says that the Brexit deal “has provided a degree of clarity”, any optimism is unlikely to flow through to the jobs market as the pandemic rages on.  

Hays is most exposed to the domestic recruitment market and saw its net fee income from the UK and Ireland fall by a fifth year-on-year in the December quarter. Back in October, the group anticipated that it would be “modestly profitable” in the six months to 31 December. But as hiring activity in Australia improved following the easing of local lockdown restrictions, and business confidence started to pick up in Germany, it is now guiding to £25m of operating profit for the first half – that’s down from £100m a year earlier.

By and large, Hays, Robert Walters and Page saw more resilient recruiting activity across the IT, life sciences and healthcare sectors. It therefore comes as little surprise that rival SThree (STEM) has outperformed all of them during the pandemic, given its specific focus on ‘science, technology, engineering and mathematics’ (STEM) jobs. The group’s net fee income for the year to 30 November fell by just 8 per cent at constant currencies to £309m and it increased its market share the US, Germany, Netherland and UK.

SThree’s second largest operating region is the ‘Germany, Austria and Switzerland’ region – known as ‘DACH’ – which accounts for just over a third of overall net fee income. While DACH net fees declined by 3 per cent at constant currencies, this belies a 4 per cent increase from the life sciences sector amid higher demand for quality assurance and clinical research professionals. One of SThree’s clients in Germany is pharmaceuticals company BioNTech (US:BTNX), and it helped supply experts for the development of its Covid-19 vaccine.

Life sciences growth was even stronger in the US – the world’s largest STEM staffing market – coming in at 16 per cent. This was accompanied by 9 per cent net fee growth from the technology sector as the pandemic has accelerated digital transformations, increasing demand for expertise in mobile application and software development.

Excluding lease liabilities, SThree was sitting on £50m of net cash at the end of November, up from £31m at the half-year stage. It has repaid all furlough support received from the UK government as well as a £50m revolving credit facility that was drawn down but not used.

Having opted not to pay an interim dividend, the group has reinstated the final payout. It is handing shareholders 5p per share, which analysts at Jefferies say is “more generous than anticipated.”

All of the recruiters mentioned here are in net cash positions, meaning that they should be able to withstand further labour market turmoil. SThree is certainly faring better than its rivals thanks to its specialist focus, more limited UK exposure and weighting towards less cyclical contract recruitment. Still, given the uncertainty ahead we’re sticking to hold for now.

Last IC View: Hold, 232p, 14 Apr 2020