ii view: Hays gives back recent gains after profit warning

Second-quarter trading update to 31 December

• Overall like-for-like net fees down 10% 
• Like-for-like German fees unchanged 
• Like-for-like Australia & New Zealand fees down 20% 
• Like-for-like UK & Irish fees down 17%
• Net cash of £60 million, down from £75 million at the end of September

Chief executive Dirk Hahn said:

"Overall market conditions became increasingly challenging through the quarter, including a clear slowdown in most markets in December.

“Looking ahead, our strategy is increasingly focused on enhancing our leading positions in the most attractive and skill-short markets globally, including Germany, non-Perm and Enterprise clients. I am confident our current initiatives will materially benefit profitability once our end markets stabilise."

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ii round-up:

Global employment agency Hays (LSE:HAS) today reduced its full-year profit expectations as hiring in December slowed markedly.

Net fees for the three months to the end of the year fell 10% year-over-year, with fees in December down 15%. As such, Hays now expects annual pre-exceptional operating profit of around £60 million compared to current City forecasts of about £73 million. 

Shares in the FTSE 250 company were down 19% at the opening bell at levels not seen since the pandemic crash, although they did attract buying interest to trade down a more modest 7% at lunchtime Tuesday. The shares are down about 18% over the past year. That compares with a near one-fifth fall for smaller rival Robert Walters (LSE:RWA) and a 1% retreat for both similar sized rival PageGroup (LSE:PAGE) and the FTSE 250 index itself.  

Hays recruits across 21 specialisms, with information technology its biggest at around a quarter of total fees followed by accountancy and finance at 15%, then engineering at just over a tenth and construction & property the same. 

Client hires of permanent staff, accounting for around two-fifths of group revenues, slowed to a drop of 25% in December compared to fall of 15% in the first quarter, hit by slower client and candidate decision-making and against a highly uncertain economic and geopolitical backdrop.

Temporary staff hires, accounting for the balance of three-fifths of group revenues, fared better, falling 5% in December and 4% during the quarter compared to no change in Q1, hindered by a lack of the usual end-of-year seasonal pick-up.

Consultant headcount was cut by 5% during the quarter, with overall management actions expected to produce annualised cost savings of £30 million from the first half and further material cost savings expected to be made in the second half. 

Group net cash fell to £60 million from £75 million at the end of the previous quarter and following the payment of £68 million in regular and special dividends. 

Broker UBS reiterated its ‘buy’ rating on the shares post the update highlighting what it believes is an attractive valuation.  

First-half results to the end of December are due on 22 February.  

ii view:

Hays is a UK and overseas recruitment company. It now employs just over 12,000 staff in 249 offices across 33 countries. Founded over a century ago and headquartered in London, Germany generated its biggest slug of operating profit over its last financial year at 51%, followed by Australia and New Zealand at 16%, the UK & Ireland at 15%, and the Rest of the World the balance of 18%.  

For investors, the tough and uncertain economic backdrop is clearly hindering corporate customer confidence in making permanent and even temporary employment hires. Costs generally for businesses remain elevated, estimated future dividend cover of 1.2 times sits below the three-year average of three times, while currency movements such as those for its Australia & New Zealand business can affect profits.  

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On the upside, diversity in both customer industry sector and geographical region exist, while skill shortages across its industry segments such as IT may persist. Group net cash is held, little company outsourcing of recruitment in many international markets offers room for longer-term growth, while a forecast dividend yield of over 5% (not guaranteed) is attractive.  

For now, and while downside risks clearly remain, investors may give the recruiter the benefit of the doubt given its exposure to an economic recovery at some point in time. 

Positives: 

• Business sector and geographical diversity
• Attractive forecast dividend (not guaranteed)

Negatives:

• Economic outlook uncertainty
• Relatively new chief executive

The average rating of stock market analysts:

Buy