When it comes to investing in the highly-cyclical recruitment sector, it is something of a rule of thumb that temporary contracts tend to be more resilient, as does placing technical or specialised staff. On that basis alone, recruiter Harvey Nash (HVN) looks appealing. But the group is also benefiting from action taken last year to streamline the business to further focus its efforts on technology staffing. At the same time, management is pursuing both organic and acquisitive growth opportunities, all of which has led to a virtuous cycle of broker forecast upgrades (see chart).
Repeated analyst upgrades
Strong, well covered dividend
Very low rating
Technology focus
UK challenging
Recently moved to Aim
In the half year to the July 2017, two-fifths of Nash's placements were into technology roles or technology companies, while it placed 8,775 contractors (temporary placements) compared with 1,197 permanent roles. Attributes like this are all the more important when UK investors are haunted by Brexit uncertainties. The group also does executive search work, sourcing high-level employees for businesses. The average contractor for the business earns more than $100,000 (£75,300) per year.
The UK and Ireland combined are Harvey Nash’s second-largest geography, contributing a combined 38 per cent of 2017 net fee income. The market is challenging but Nash is winning share and net fees were down just 1.2 per cent in the first half to £18.2m. Trading was far better in mainland Europe, the group's largest market at 40 per cent of net fees, which was buoyed by its performance in Benelux. Overall, first half operating profit grew 12.4 per cent.
Following a strategic review last year, and the sale of some non-core businesses (reflected in a drop in 2017 reported profits in our table), the group moved its shares' listing from the main market to Aim in July. It said it felt Aim was “an environment more appropriate to the group’s scale and acquisition strategy”. True to management's intent, in September Nash completed the acquisition for up to £10m of Crimson Limited, a UK technology recruiter. In early July, prior to the Aim move, it bought Nordic executive search consultancy PAT Management AB for up to £3.4m.
Analysts at Panmure Gordon expect these acquisitions, combined with restructuring of the business in the UK and US to lead to an expansion in the conversion ratio – the ratio of operating profit to net fees that is the key measure of profitability for recruiters. This is expected to rise from 9.5 per cent last year to 11.3 per cent in the 2018 financial year, and then 12.4 per cent in 2019.
| HARVEY NASH (HVN) | ||||
| ORD PRICE: | 91p | MARKET VALUE: | £67m | |
| TOUCH: | 90.75-92.75p | 12-MONTH HIGH: | 104p | LOW: 54p |
| FORWARD DIVIDEND YIELD: | 5.1% | FORWARD PE RATIO: | 7 | |
| NET ASSET VALUE: | 86p* | NET DEBT: | 16% | |
| Year to 31 Jan | Net-fee income (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 90 | 9.0 | 9.0 | 3.5 |
| 2016 | 90 | 9.3 | 9.4 | 3.9 |
| 2017 | 98 | 8.6 | 8.6 | 4.1 |
| 2018** | 103 | 10.7 | 10.8 | 4.3 |
| 2019** | 111 | 12.7 | 12.8 | 4.6 |
| % change | +8 | +19 | +19 | +7 |
| Normal market size: | 3,000 | |||
| Matched bargain trading | ||||
| Beta: | 0.77 | |||
*Includes intangible assets of £58m, or 78p a share **Panmure Gordon forecasts, adjusted PTP and EPS figures | ||||
