SThree keeps growing

Recruitment freezes at Facebook and Google have stolen headlines this summer. However, business is still booming at SThree (STEM), a recruitment company that finds jobs for science, technology and engineering experts. 

SThree enjoyed double-digit fee growth across all of its regions and sectors in the six months to 31 May, and productivity is up 14 per cent. These factors drove SThree’s operating profit up by 61 per cent to £44.6mn, against already strong 2021 figures. 

Technology remains SThree’s biggest source of revenue and a main source of growth. However, the group's performance across the board has been impressive, with engineering fees up 26 per cent year on year – buoyed by jobs in the energy sector – and life sciences up 17 per cent. 

The group expects its 22 per cent profit conversion ratio (which represents operating profit over net fees) to “reduce significantly” in the second half of the year, as it recruits more staff and invests in IT. Margins for the whole year are expected to settle at 17.5 per cent. 

However, the big worry for investors is around demand: will a job market slowdown reduce the need for recruitment services?

These concerns are evident in SThree’s share price, which has fallen by 19 per cent over the past year. As a result, its forward PE ratio stands at 10.9 – compared with a five-year average of 12.6 – and its enterprise value/net fees ratio is only a fraction above 1. This last metric compares SThree's enterprise value – market cap minus cash – with its total revenue minus the cost of sales. Analysts at Panmure Gordon note that EV/net fees reached 1.9 late last year, but dipped as market confidence continued to wobble. 

Job market anxiety is not unfounded, but momentum is still building at SThree, which has grown its order book by 35 per cent year on year. Its focus on contract work should also make it more resilient during a downturn, when permanent roles may in fact be more at risk. Buy.

Last IC View: Hold, 465p, 31 Jan 2022