Hays makes headway while the sun shines

Recruitment companies are full of the joys of spring. After a long Covid winter, the job market is booming, wage inflation is mounting and skills are in short supply. Hays (HAS), which specialises in white-collar recruitment, is no exception.

The group reported record fee income and its fastest ever profit growth for the six months to 31 December. Its ‘conversion rate’ – the conversion of net fees into operating profit – is particularly striking at 18 per cent, compared with 5.9 per cent in 2020.

Group finance director Paul Venables said the “red hot job market” has turbocharged Hays’ performance. Companies in need of temporary workers, for instance, are paying agencies more to secure staff. Meanwhile, in the permanent jobs market, Hays is benefiting from wage inflation, as its fees are calculated as a percentage of the salaries of the people it places.

Hays looks well placed for future growth. For starters, technology is by far its largest specialism, contributing a quarter of group net fees, and the pandemic is likely to boost demand for tech specialists. (In the UK, tech fees shot up by 50 per cent over the six-month period.)

Meanwhile, management is confident that more companies – particularly outside of the UK – will choose to outsource their hiring activities in the wake of Covid-19. This makes sense, particularly if in-house HR departments have been cut back over the past two years. 

The company also has the people power to drive further growth. Many recruitment agencies slashed jobs in the early stages of the pandemic, as clients froze hiring plans. However, Hays’ consultant headcount is now about 5 per cent higher than pre-Covid levels. It expects to expand by a further 3-5 per cent in the third quarter of 2022, led by Germany, its largest business arm. 

After its strong half-year performance, Hays has a healthy cash pile of £236.9mn. As a result, management is offering a dividend of 0.95p, compared with nothing this time last year. The board also expects to announce a “substantial” special dividend on the publication of its preliminary results in August. Venables said this will likely be “well in excess” of £100mn.

The group expects operating profit for 2022 to be between £210mn and £215mn, ahead of consensus market expectations (Bloomberg median consensus operating profit for 2022 stood at £203.5mn this month). However, it is unclear whether the job market will continue to boom as the months progress, particularly given recent global events. Recruitment companies are highly cyclical businesses, and difficult market conditions could undo much of Hays' good work. Hold.
 

Last IC View: Hold, 161p. 26 Aug 2021