Another record year for PageGroup – but what next?

So far so good for recruitment company PageGroup (PAGE), which is celebrating another record year. Operating profit rose by 14 per cent to £196mn in the 12 months to 31 December 2022, on the back of 19 per cent revenue growth. 

However, figures from the second half of the year suggest storm clouds are gathering. The group’s “conversion rate” – which refers to operating profit as a percentage of gross profit – dropped from 21.4 per cent in the first half to 15 per cent in the second half, as a result of “more challenging trading conditions'' in the majority of its markets, “together with the impact of Covid restrictions in Greater China”.

The situation won’t have been helped by the group’s large and expensive workforce. PageGroup increased its fee earner headcount by 861 in 2022, meaning there are now 9,020 consultants working at the group, compared with 7,698 before the pandemic struck. 

PageGroup knows better than anyone that staff don’t come cheap these days, and about three-quarters of its cost base is employee related, including wages, bonuses, share-based long-term incentives and training expenses. As a result, the hiring spree pushed up PageGroup’s total administrative expenses by almost 25 per cent to £880mn, and this coincided with a slowdown in demand in the second half of the year. 

PageGroup hasn’t been stung as badly as Hays (HAYS), where high employee costs caused operating profit to fall in spite of record fees. However, management said it will reduce its headcount where the outlook for growth or fee-earner productivity is weak. It remains confident about some areas of work, however, including technology and healthcare and life sciences, and said it “continues to see candidate shortages and good levels of vacancies”.

There is very little detail about the outlook for 2023 in PageGroup’s results. However, management stressed that it could easily cut costs during a downturn due to the high levels of natural attrition recruiters experience. Meanwhile, some uncertainty is already built into the price: PageGroup’s forward price/earnings ratio sits at 15.1, below its five-year average of 16.7, according to FactSet figures. 

We remain circumspect, however. It has been difficult to second-guess the labour market since Covid hit, and it is possible that companies will keep hiring and workers will keep moving. As the economic backdrop darkens, however, this is far from guaranteed, and consensus forecasts suggest that revenue and profit will fall next year. Hold. 

Last IC View: Hold, 414p, 8 Aug 2022