Sthree trading ahead of pre-Covid levels

It would be fair to say that labour markets are still in a state of flux. Economic dislocation and unprecedented levels of government support have muddied the waters.

The Office for National Statistics revealed that the number of job vacancies in the UK surpassed pre-pandemic levels in the three months to June. The situation is mirrored across the Atlantic and elsewhere, but the true extent of the economic damage wrought by the lockdowns will not become apparent until all the central government support schemes are eventually pulled.

None of this seems to have been too much of a problem for SThree (STEM), judging by its latest interim figures. The recruiter, whose concentration on jobs involving science, technology, engineering and mathematics gives explains its 'STEM' share price ticker, revealed that annual earnings are now expected to be ahead of analysts' estimates for FY 2021.

Operating profit more than doubled to £28.2m in the six months through to 31 May, with net fees 10 per cent to the good at £164m. It is difficult to judge whether last year’s comparators are wholly relevant given the differing levels of disruption linked to the pandemic in either period, but it is difficult to ignore a jump in the conversion ratio from 9.5 to 17.2 per cent. Admittedly, the number of consultants has contracted, but a stronger placements-to-vacancies ratio points to increased efficiencies, regardless of the trading backdrop. And the recruiter’s chief executive, Mark Dorman, makes the point that performance “compares favourably against the pre-Covid operating environment”.

This noteworthy improvement in consultant productivity is coupled with a one-third increase in the contractor order book, which improves prospects for further net fee growth. Contract and permanent net fees were up by 8 per cent and 18 per cent respectively, with strengthening momentum in the latter category evident in the second half thus far.

Finances are sound with net cash (ex-lease liabilities) of £47.5m, marginally below the level recorded at the November year-end. And there is a 3p interim dividend headed shareholders’ way.

Panmure Gordon anticipates net fees and adjusted profits of £338m and £50m for FY 2021, against £309m and £30.1m for the 12 months to November 2020.

Much depends on the clinical situation on the ground, but firms are clearly looking to fill permanent vacancies. Indeed, with more contractors on summer breaks, and consequently fewer hours worked, SThree will step-up its own hiring process. The shares aren’t overly expensive at 18 times Panmure Gordon’s forward estimate, but we remain on the sidelines. Hold.

Last IC view: Hold, 337p, 25 Jan 2021