U.K.-based recruitment company published its prelim results for the year to 30 June. The company’s balance sheet is strong, it is roughly breaking even and I remain confident that the company will ride out the current market trough. However, there are few signs for now of a meaningful recovery in the company’s end markets, so little reason to upgrade the stock.
Full Year Results Showed Some Resilience
This clearly wasn’t a good year for Hays or the rest of the recruitment industry. That said, the company’s full year results were not terrible. In my opinion they showed some resilience on the part of the company.
While topline revenue was affected less than might be expected by the COVID-19 pandemic and economic downturn, profits were down almost by half.
Source: company prelim results
The company said that Q4 revenue was down 34% and at the profit level it was broadly breaking even. Given that this is the period to date during which the biggest hit would have been felt from the pandemic, I think that performance is creditable. Rather immodestly, but accurately, the company uses the same word to describe its own performance. Having looked at the job market myself and spoken to others in it, I know that companies have tightened up or frozen hiring in many cases.
The Company’s Cash Position is Strong
In my June piece In A Horrible Recruitment Market, Hays Will Survive – But Stay Away For Now, I outlined the bear case against Hays in the current recruitment environment but explained why it would survive this year’s challenges.
The growing cash pile bolsters this argument. The company said that it ended the year with “the strongest balance sheet in (its) history”. The company is now sitting on net cash of £366.2 million excluding short-term deferral of tax payments. Including those the cash position is even stronger, at £484.5 million. In its results it revealed a 183% cash conversion of operating profit into operating cash flow, due to a tightened credit control and a c.£100m partial unwind of debtors in its Temp division. It also added c.£196 million through an equity raise in April.
Some of these levers can basically only be used once, but they do show the company’s ability to raise cash urgently if needed. The partial unwind of debtors in the Temp division is a good illustration of this. Hays, like other agencies, supplies temporary workers on a weekly basis, let’s say. Typically, customers may pay in arrears, and not necessarily on time. But if the screws are turned, the agency can tell the customer to pay immediately to ensure continued service. For the customer who need the temp in the reception, factory floor or warehouse who already know what they are doing as they have been there a few months already, it’s better to pay up than have to find a new temp from a different agency. It’s not a very elegant way of doing business, but like estate agency, recruitment isn’t usually an elegant business.
So, as the prelim results indicate with the cash situation, the company has positioned itself for survival.
The Recruitment Market Remains Tough
The question for investing in Hays, now or later, is at what point will recruitment activity levels return to a sustainably profitable level?
In its results, the company said that the outlook remains tough across its main markets. Temporary markets are stable overall, with signs of modest improvement in the permanent business. The stability is not necessarily a good thing: in its home U.K. market, for example, the company said that business currently is “stable at low levels”.
For now, it seems the company’s markets will remain challenging for the foreseeable future. I expect this to weigh on the shares, which will probably not have significant upward momentum prior to any meaningful recovery in the company’s markets.
No Dividend and a Weak Case for Investing Now
The company didn’t even mention its interim dividend, which it had cancelled in April after declaring it. So unlike some companies, it’s not being paid belatedly. That’s no surprise.
The company passed on paying a final dividend and said simply that it would look to pay dividend again as soon as is appropriate. At the present time, I doubt it will see fit to pay an interim dividend next time either, as business will not have recovered fully and it will want to maintain some financial strength.
So for now, the investment case rests either on a strong upturn in business or a future restoration of dividends. I expect both to happen at some point, but neither to happen in the short-term. When they do happen, the market will likely rerate the shares upwards. Until then, there is no compelling case to park money in the shares. Indeed, their price after the final results announcement today is 116p, exactly where they traded when my June piece was published.
The Current Valuation Reflects the Market’s “Wait and See” Attitude
At the moment there is material uncertainty over employment prospects in many of the company’s key markets. Broadly speaking that is negative for the company. While it can lead to some more demand in the temp market, less recruitment means less fees.
The Q2 performance gave an indication of what is to come, with reduced topline billing and a more challenging environment for profits, while pandemic-related measures have saddled the company with additional costs for anti-pandemic measures, which will persist for a while. The company did say that it is looking at specific ways to cut costs, but that is never a sustainable path to growth in my view. More encouragingly the company has identified over twenty accelerated headcount investment projects in attractive structural growth markets, which while it may not help much in the next couple of quarters, does set up longer term potential once the employment market returns to a steady equilibrium.
Meanwhile, the company trades on a p/e of close to 40, which is not good value. Earnings are likely to stay deflated for some time, so the p/e may remain at similarly high levels for the foreseeable future. on that basis, the current share price offers poor value.
For now, the drivers for the company’s earnings are largely exogenous: how fast the employment market returns to health. I don’t think many people expect that to happen in the coming quarter, so the market is discounting the long-term valuation of Hays for evidence of a pickup in employment trends. On that basis, I see little upside in the shares until late in the year, when any positive earnings news could provide a fillip.
Conclusion: Wait for Signs of Recovery
There are a couple of ways to play Hays for now, in my opinion. Either one can take a view that there will be a recovery, at signs of which the shares will move up, so get in now to benefit from that rise. Or one can wait for tangible signs of that recovery, which might not arrive for six to twelve months, and only buy at that point. Shares may be slightly more expensive then, but there will be less downside risk and capital won’t be tied up for months or years waiting for the nascent recovery. So, while I still like the company long term, for now I would avoid its shares.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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