Demand still high for SThree’s services

Ever since the UK economy took a turn for the worst, temporary job placements have proved more resilient than permanent ones. This has played into the hands of SThree (STEM), a recruitment agency that focuses on contract work in the technology, engineering and life sciences sectors.

Demand for the group’s services is proving robust. Net fee income dipped by just 2 per cent on a like-for-like basis in the period against a tough comparator. (Fee income shot up by a quarter in the first half of 2022). Contract fees - which now account for 81 per cent of total fees - were key, edging up by 3 per cent as a result of “strong extensions, robust pricing and increased contract lengths”, which helped to offset a slowdown in new business. In contrast, permanent fees fell by 19 per cent. 

Geography also played an important part: SThree noted decent growth in Germany and the Netherlands, but difficult conditions in North America. 

Profitability took a hit in the period, with statutory profit before tax tumbling by a fifth to £38.5mn. Management blamed this on its major “technology improvement programme” which should improve productivity by 2025 and which is “on track and on budget”. However, the group also contended with higher staff costs. 

Looking ahead, management expects full-year trading to be in line with expectations and noted “modest improvement” in new placement activity in June. Its contractor order book is solid at £190mn - the same level as last year - which reduces the risk of nasty surprises.

Over the longer term, much will depend on how its expensive IT project pans out. However, SThree’s valuation is certainly tempting. The group is trading at a discount to both its previous price and to peers such as Hays (HAS) and PageGroup (PAGE). This is despite a strong market niche and superior long-term growth. Buy. 

Last IC View: Buy, 412p, 30 Jan 2023