SThree's numbers unlikely to be magic

The word ‘resilient’ did a lot of heavy lifting in SThree’s (STEM) annual results statement, as the specialist staffer reported like-for-like sales were flat and pre-tax profits were slightly weaker than in the prior year.

The company, which places staff working in fields such as science, technology, engineering and finance, said that a “challenging” macroeconomic backdrop meant net fees fell by 4 per cent, with two of its three core markets – Germany and the US – reporting declines of 4 per cent and 14 per cent, respectively. 

Fees from permanent placements dropped by more than a fifth, which was partly the result of companies making fewer hires but also SThree’s decision to focus on the contract market within certain geographies, including the US and the UK. It cut headcount among permanent recruiters by 17 per cent, and this part of the business now only makes up 18 per cent of net fees. 

The contract market held up, though, with fees increasing by 1 per cent on what was a tough prior year comparator. Contracts are also becoming longer as businesses put off making permanent hires, and margins remain robust – the average margin earned on contracts was 21.7 per cent. 

SThree’s shares slipped by 2 per cent and are now down 7 per cent since the start of the year. This is understandable, particularly as 2024 is unlikely to be a banner year. Although contract renewals since the November year-end have been strong, new business wins are still “soft”, chief financial officer Andrew Beach said. He expects a pick-up in activity in the second half of the year.

Moreover, this is the year in which spending on its IT transformation project peaks. SThree has spent £14mn over the past two years, but needs to invest between £13mn and £18mn this year and has set a further £3mn aside as contingency for potential overruns. CEO Timo Lehne describes the project as a “game changer”, arguing that it will allow the company to automate many more processes, meaning its back office should run more on a fixed as opposed to a variable cost basis. “So we can really scale the company without the continuous big need to invest to support growth,” he said.

FactSet-complied analyst consensus is for SThree’s earnings to slide by 7 per cent to 41p a share for FY2024. Even so, at 10.3 times forecast earnings, the shares are trading below their five-year average of 12 times and well below peers. Buy.

Last IC View: Buy, 361p, 25 Jul 2023