HAYS
Fees £764.2m Profits £156.1m
Hays deals impressively well with the perils of being in recruitment, a sector inextricably linked with the ebbs and flows of the economy.
It is perhaps the most diversified of its peers in the listed sector, which include Michael Page, Robert Walters and Harvey Nash.
First, Hays is not overexposed to a single sector, recruiting broadly from construction to IT, accounting and finance. Second, it places more temporary than permanent staff, meaning that it can respond to the changing employment needs of its clients.
Last, it is geographically widely spread, operating in 33 countries, ranging from Britain, continental Europe, North America, Asia Pacific and Australia.
The fruits of its strategy were on display in yesterday’s annual results, where pre-tax profits for the year to the end of June came in 18 per cent higher at £156.1 million, despite a £9.6 million “headwind” as a result of currency fluctuations in its overseas markets.
Fees and operating profits at all of Hays’s divisions rose healthily, particularly in the UK and Ireland, which accounts for roughly a third of its business.
Australia returned to growth and 16 other countries, including Belgium, Switzerland and Spain, delivered growth of 10 per cent or more.
Hays also managed to convert just over half its fees into bottom-line profits, comfortably ahead of the sector average.
It stuck to its target of double its 2013 operating profits to £250 million within the next three years, suggesting it believes that it can grow substantially even if the global economic recovery remains a gentle one for the next few years.
At £31 million, debt is low and Hays expects to have net cash during the course of next year, with the eventual aim of making special returns to shareholders.
The shares, up 3p at 157¼p yesterday, are not cheap, trading on a multiple of about 20 times earnings and with a dividend yield barely above 2 per cent.
Hays has shown its resilience, however, and clearly believes that there is more growth to come, not least through the acquisition of the American IT staffing company Veredus that Hays bought for £36 million last year.
Worth the price.
MY ADVICE Buy long term
WHY Despite being exposed to economic cycles, Hays shows resilient and growing earnings and there is plenty of room for more growth
Grafton Group
Profits £57.9m Margin 5.6%
The white vans are revving up for Grafton. The builder’s merchant and DIY group put out a strong set of first-half numbers yesterday, as it rode the coat-tails of Britain’s housing boom and the economic renaissance in Ireland.
Grafton has come a long way since the financial crash in the Republic, which accounts for about a quarter of its business.
Having taken the razor to costs, shifted its primary listing from Dublin to London and brought in a new chief executive in the shape of Gavin Slark, the highly regarded former BSS boss, it is now enjoying the benefits. Pre-tax profits jumped by more than a quarter to £57.9 million in the six months to the end of June on revenues up 7 per cent at just over £1 billion.
Margins, horribly slim in this sector, improved from 5 per cent to 5.6 per cent, but remain shy of the 7 per cent target. Debt is manageable, at £51.1 million, and the dividend was lifted by a fifth to 4½p.
Grafton is highly geared to the housing market, particularly through servicing the repair, maintenance and improvement markets. Management is, however, pressing all the right buttons, including trying to push opportunities to cross-sell products to those jobbing builders.
There are plenty of competitive pressures, not least from Travis Perkins and there is always the risk that Grafton could fall victim to a price war.
The shares, at about 16 times earnings, trade on a par with sector rivals, but only because they have had a poor run in recent weeks. Respectable but not compelling.
MY ADVICE Avoid
WHY Expensive sector and looming pressure on margins
Servelec
Profits £4.8m Dividend 1.65p
Casting our eye over the recent flotation of Kainos, we noted that not all UK technology companies have been hit by British investor indifference to the sector. Another quiet achiever is Servelec, the Sheffield-based industrial software company, whose shares are up 40 per cent since its listing in December.
Servelec is an odd beast and sits worlds away from the app makers and digital designers of Shoreditch. It was founded in the 1970s to develop software for control systems for steel mills. Those now control the country’s national gas grid and large parts of the nation’s water network as well as North Sea oil and gas platforms, broadcast masts and the nation’s lighthouses.
The shares had been hit by concerns over China and the oil and gas sector, but first-half results proved strong enough to send them up 6 per cent yesterday. Revenue rose 20 per cent to £30 million and pre-tax profits grew 9 per cent to £4.8 million. A 10 per cent rise in the dividend shows its mature side.
Servelec has added steel to the UK tech sector. It trades at 16 times forecasts but a push into healthcare and social care software looks sideways. Hold for income for now.
MY ADVICE Hold for income
WHY Strong results dispel oil and gas weakness worry
And finally . . .
Arrow Global turned in another stellar performance, only to see its share price virtually unmoved. The buyer of books of consumer loans reported pre-tax profits up 21.1 per cent to £16.4 million in the six months to the end of June on revenues 48.6 per cent higher at £76.7 million. It has continued to buy loan books, at what look like attractive prices, despite the presumption that the improved economy will make them less risky and so more expensive. The shares, priced at the October 2013 listing at 205p, fell ½p to 267½p.
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