PageGroup trims headcount as costs bite

PageGroup’s (PAGE) year-on-year earnings fell by almost half as the macroeconomic climate weighs on the recruitment market, with chief executive Nicholas Kirk pointing to “lower levels of both candidate and client confidence resulting in delays in decision making” as the company cut staff numbers. There were no great surprises in this set of results – the market received a detailed trading update last month – but there were still some positive signs for white-collar recruitment demand despite headwinds. And an uptick in the ordinary dividend, plus the confirmation of another special dividend, should help soothe investors' nerves.

Not so long ago, recruiters like PageGroup and peer Hays (HAYS) were taking on staff with abandon. Times have now changed. The bottom line was hurt by a 9 per cent increase in admin expenses, driven by a higher average headcount in the first half despite fee earner job cuts and inflationary pressures. Job reductions were expected and a total headcount at the half-year point of 8,572 was down by 5 per cent against December, with fee earner numbers cut by 558 in the half.

Gross profit was down by over 2 per cent, while operating profits slid by 45 per cent. The contraction in profitability metrics bled through to the company’s conversion rate, which measures operating profit as a percentage of gross profit. This slipped to 12.1 per cent, down from 21.4 per cent for the same period last year.

Revenue growth was driven by an 11 per cent uplift in the company’s EMEA market, by far PageGroup's biggest division, and the only geographic market to post a positive gross profit movement. Top-line growth was also seen in the Americas, but revenue went backwards in Asia Pacific and the UK in challenging market conditions.

RBC Capital Markets analysts argued that there is “significant upside potential to our mid-cycle-derived price target of 570p, despite factoring in what we see as a realistic recessionary scenario through FY24 and we believe the 8 per cent FY24E dividend yield (incl. special) offers support”.

Management kept its – limited – guidance unchanged, with the board expecting full-year operating profits to sit in line with the company-compiled consensus. The company is still benefiting from labour market shortages and high fee rates. But a forward price/earnings ratio of 14 times, according to the FactSet analyst consensus, is a fair rating in our view given the outlook, despite representing a discount to the five-year average of 16 times. Hold.

Last IC view: Hold, 457p, 09 Mar 2023