SThree unfazed by recruitment slowdown

Specialist staffer SThree (STEM) has reported record profits and “exceptional” productivity in its full-year results. The group – which fills white-collar jobs in science, technology, engineering and finance – saw net fees rise by 21 per cent to £431mn, while operating profit increased by 28 per cent to £77.6mn. 

The big question, though, is what happens next. Management noted “softer conditions” towards the end of the year, in keeping with statements from PageGroup (PAGE) and Robert Walters (RWA) earlier this month. However, SThree has some important weapons in its arsenal that the general staffers lack. For starters, 78 per cent of its net fee income comes from contract placements, and demand for temporary staff is holding up very well as businesses try to keep things flexible. Secondly, demand for tech and engineering skills is proving to be extremely robust, and “structural megatrends” mean this is unlikely to change any time soon. 

These factors have translated into some encouraging figures. SThree’s contractor order book is up by 19 per cent year on year at £186mn, which provides decent visibility (according to management, it covers around a third of fees for 2023). Meanwhile, trading so far this year has been in line with expectations.

Unlike PageGroup and Robert Walters, SThree wants to keep growing its headcount in 2023. It is also pumping money into a new IT project designed to help new consultants, who currently take up to two years to reach full productivity. In 2022, it incurred programme costs of £4.1mn and the total project is expected to cost between £30mn and £35mn. Not all of this will hit the income statement, but it is expected to impact margins for the next couple of years by between 1 and 1.5 percentage points. 

Given the economic backdrop, investing in more people and projects feels somewhat counterintuitive. However, SThree’s end markets are proving robust and – assuming this doesn’t radically change – it should emerge from the turmoil in better shape than ever. The internal running of the company also seems to have improved, with employee churn falling from 40 per cent to 30 per cent. This should help with productivity, as the group will be training up fewer new starters. 

SThree’s share price has risen since we covered the company in the Ideas section last October. However, with a forward price/earnings ratio of 10.6, it’s still cheaper than its five-year average and has good long-term growth prospects. Buy.

Last IC View: Buy, 352p, 20 October 2022