Recruiters profiting from exceptional labour market

Tight labour markets are a mystery and a concern for businesses across the world. In recently released ONS data, total job vacancies in the UK were 1.10m, the highest on record but total hours worked per week were still below pre-pandemic levels. This data paints a disturbing picture of the UK but difficulty filling roles is a global phenomenon. Businesses need workers and are struggling to find them, which will lead to a rise in wages and a reduction in earnings. Not good news, unless you are a recruitment consultant.

PageGroup (PAGE), Hays (HAS) and Robert Walters (RWA) have all posted strong trading updates recently off the back of an exceptional labour market. “This is the hottest market for permanent workers I have seen since I started here in 2007, particularly technology, marketing and life science, which are well above pre-pandemic levels,” said Hays finance director Paul Venables.

For the three months to September, Hays’ revenue increased 36 per cent and it saw growth across all regions. The UK grew the fastest, expanding by 44 per cent. The strong demand for new employees, especially in technology and life sciences, means Hays’ consultants are placing candidates more quickly than ever. “Companies don’t have time to deliberate on candidates because the competition for them is so high,” explained Venables.  

With employees working harder to keep up with demand, the company is boosting headcount. In the last quarter, it increased by 8 per cent, 19 per cent year-on-year, and it expects headcount to increase by c.2-4 per cent in the second quarter.

Broker Numis is impressed with its recovery and increased its full-year 2022 cash profit (Ebitda) forecast by 3 per cent to £183m. But it thinks the “shares are up with events for now and see greater value elsewhere in the sector”. Hays trades on a forward PE of 22.

The “greater value” it sees could be at Page Group, which is currently trading on a more affordable forward PE of 18.4, according to FactSet consensus. Page Group saw its gross profits jump 58.9 per cent to £228m in the third quarter of this year compared to 2020 and, against 2019, its gross profit was up 12.9 per cent.

Efficiency rates are also well ahead of last year. The recruiter increased its total fee earner headcount by 329 to 5,772 but this is still below the 6,081 during the corresponding period in 2019. With higher profits and lower headcount, its gross profit per fee earner was up 21 per cent.

Robert Walters’ third quarter update looked similar. Group fee income was up 26 per cent and it expects profits to be comfortably ahead of guidance. Asia-Pacific was its fastest growing market, where revenue was up 46 per cent. In the UK, it grew a more a modest 17 per cent, while its overall consultant productivity was up 16 per cent.

Recruiters are usually a good bellwether for business confidence. Firms don’t hire people unless they are confident that demand for their products and services will remain positive. But a recent speech from Bank of England governor, Andrew Bailey, however suggests this spike in recruitment could be a pandemic-specific oddity. He believes that companies might have increased hiring in anticipation of an economic boom and want to move quickly in case their competitors get the best candidates before they can. It’s essentially panic buying, except instead of petrol or loo roll, it is people.

If Bailey’s hypothesis is true, then this could be the peak for the recruiters rather than the beginning of unprecedented growth. A structural rise in wages seems possible though. From June to August annual pay growth in the UK was 7.2 per cent. Even if the volume of candidates falls from recent highs, recruiters should continue to profit more from each candidate placed.

The recruiters themselves aren’t suffering from the same squeeze on salaries. “[Hays] consultants are on low salaries but get paid a high commission, so we have a natural hedge,” said Venables. Recruiters aren’t flashy businesses, but as a beneficiary of wage inflation, they suddenly look at lot more appealing.