Cost inflation is biting many companies on the backside on their way out of the pandemic. But for recruitment groups such as Hays, it provides a shove in the right direction for profits. It’s not just lorry drivers that are in short supply, employers in white collar industries such as technology, accountancy and finance are also paying more to attract hard-to-find staff. Taking a fee based on a percentage of a candidate’s salary means rising wage inflation plays well for recruiters.
That’s on top of the broader rebound in hiring among employers, which meant net fee income was up just over a third during Hays’ first financial quarter and prompted earnings upgrades from analysts for the year.
Recruiters are capital-light businesses, so a recovery in fees translates into strong free cashflow and ebullient shareholder returns. Employers are also paying up faster, with debtor days falling to a record low of 33 days last year.
Special dividends have been faster to recover than during the aftermath of the 2008 financial crisis, when one-off returns took until 2015 to re-emerge. A special dividend was declared last year but management said those income extras should be par for the course from this financial year. Davy, the broker, is forecasting a special dividend of 7.5p a share this year and a 2.49p a share ordinary payment. At the current price, that leaves the shares offering a potential dividend yield of 6.1 per cent.
The shares are being valued for higher growth than before the pandemic, at a forward price-to-earnings ratio of almost 22. Scale should command a higher price and Hays has that over its UK-listed rivals PageGroup and Robert Walters. But so too does it have a higher bias towards temporary rather than permanent recruitment, which has made it less attractive to investors seeking to play the post-pandemic recovery.
Temporary recruitment, the preferred option for companies in times of economic uncertainty, fell less dramatically in the downturn and has naturally lagged the dramatic bounceback in permanent hiring among bullish employers. A 36 per cent rise in net fees in the three months to the end of September trailed Page’s growth rate of 65 per cent over the same period.
Boosting consultant headcount should be taken as a sign of confidence from recruiters but spending more than initially guided to has caused nervousness among investors, who are wary of increased costs eroding profit growth. Hays has added about 1,200 new consultants this year in anticipation of the rebound in hiring continuing, as well as shooting for greater fees in its strategic growth areas, of which technology is chief.
But that investment looks as if it should be vindicated. Increasing its staff numbers has been justified by rising hiring activity: productivity — net fees per consultant — reached a record during the first quarter. In addition, the rate of headcount growth should ease over the current quarter to between 2 and 4 per cent, compared with 8 per cent over the three months to September and 10 per cent over the first half, which might quell some investor angst.
Technology, the largest target industry for the group and accounting for just over a quarter of fee income, increased net fees by more than a third in its first quarter, and those were 7 per cent ahead of the pre-pandemic level. Management hopes that tapping into the sector, which is also experiencing the highest wage inflation, will double net fees to about £500 million over the next five years.
Hays justifies its higher price tag.
Advice Buy
Why Earnings stand to benefit from hiring recovery and wage inflation, which should feed through to a generous dividend
Finsbury Foods
Supermarkets are known to drive a hard bargain with their suppliers because they can’t afford to pass through noticeable cost increases to customers in the fiercely competitive grocery market. For food producers such as Finsbury, that threatens to derail a recovery in profits.
Investors are hesitant about the recovery: the shares still trade at only nine times forward earnings, below the low-teens multiples they hovered around before the pandemic.
Generating the bulk of its revenue via retailers, typically about 80 per cent, helped insulate the group from the downturn in demand from food service channels such as fast food outlets and schools during the pandemic. Revenue from food service fell 15 per cent over the 52 weeks to June, but growth in demand from retailers meant the top line was only marginally behind 2019 levels.
However, the Aim-traded group, which is one of the country’s largest cake manufacturers, has already warned that it is facing persistent challenges around inflation and shortages in skilled labour and drivers. That runs the risk not only of higher costs but also a headwind to revenue growth. Investec, the investment bank, forecasts a 5 per cent rise in revenue this year to £330 million, but a margin flat on last year at 5.1 per cent because of cost challenges.
Management hopes efficiency programmes that include standardising manufacturing processes across its bakeries and reducing food waste will help mitigate the impact of higher costs. Savings last year meant it could pay down debt, leaving it with net debt, including lease liabilities, of only £25.4 million, or 0.5 times earnings before interest, taxes, depreciation and amortisation (ebitda).
The group has the balance sheet strength for a higher dividend of 2.8p a share this year (equating to a potential dividend yield near to 3 per cent at the current share price) and the firepower to capitalise on any bolt-on acquisitions, Investec thinks.
Revenue recovery looks promising, profit growth less so. Investors shouldn’t be attracted by the lower price tag compared with larger scale private label food producers such as Greencore or Bakkavor.
Advice Hold
Why Weaker valuation justified by margin challenges