SThree banks record fee income

Companies want scientists. At least according to SThree (STEM), a staffing business that focuses on jobs in technology, life sciences, engineering and finance. Net fee income at SThree is at an all-time high, and its contractor order book is swelling, up 43 per cent yearn on year. 

Listed recruiters suffered in the early stages of the pandemic, when companies froze their hiring plans. However, SThree’s focus on 'STEM' sectors meant it fared better than the likes of Robert Walters (RWA) and PageGroup (PAGE). The widespread adoption of technology during lockdowns – particularly among retailers – spurred demand for programmers, while engineers are increasingly coveted by companies looking to decarbonise. Life sciences in the US is also booming, and these trends look set to continue beyond Covid-19.

SThree’s three largest markets are Germany, the US and the Netherlands. These regions account for 75 per cent of net fees, and fee income is on the rise, up 23 per cent, 24 per cent and 19 per cent respectively. (In contrast, the UK now accounts for just 10 per cent of group fees, and is growing less strongly.) The group is also expanding in Japan, which means it is well diversified both geographically and by sector. 

Management has proven less resilient. In December, the group announced that chief executive Mark Dorman was stepping down, and SThree's chief financial officer of 12 years has also left. Boardroom churn has spread nervousness among investors and the company’s share price lost a quarter of its value between 10 December and 25 January. 

However, things are picking up again, and the group expects double-digit net fee and profit growth for 2022. Analysts at Panmure Gordon are also optimistic, predicting that earnings per share will rise to 42.2p by financial year 2024. The broker added that current weakness in the share price could be a buying opportunity.

Investors must keep a close eye on cash flow, however. At the moment, SThree is in a strong position. It is debt-free and has net cash of over £20mn, including lease liabilities. But its cash conversion ratio fell to 40 per cent in 2020, down from 178 per cent the previous year. 

This is largely down to SThree’s business model, under which some contractors are directly employed by the group rather than by the group’s clients. Clients are then invoiced on an ongoing basis for the duration of the contract, with the group paying contractors and retaining a portion of the amount charged as a service fee. 

According to management, this means that every time the group takes on new contractors it costs money, which has a negative impact on working capital as SThree expands. The situation reverses in periods of downturn, as seen in the group's 2020 accounts. 

This is not necessarily an issue for investors – particularly given SThree's debt-free position. However, companies that need lots of working capital to operate may find there's less cash available to invest in the business. Hold. 

Last IC View: Hold, 462p, 19 Jul 2021