A company delivering financial results ahead of its 2020 performance is reassuring, but easy in most industries. However, growing ahead of numbers that were notched-up pre-Covid deserves more attention. PageGroup has done just that, posting second-quarter gross profits 2 per cent ahead of 2019 at constant currency rates and almost double last year’s level.
The recruiter raised operating profit guidance for this year to between £125 million and £135 million, ahead of a paltry £17 million last year, as the improvement in hiring activity has continued to accelerate.
The shares have risen by more than a quarter since the start of this year and more than doubled since the path out of lockdown was first laid out in November, significantly outperforming the FTSE 250 over both periods.
In fact, the market priced a clear road ahead for the recruiter. The shares currently trade at almost 25 times consensus forecast earnings this year, falling to a multiple of 18 for 2022. On a comparative basis both valuations are in the same ballpark as 12 months prior to the Brexit referendum, at a time when the UK accounted for more than a quarter of gross profits.
Some optimism is warranted thanks to improved prospects in its core markets. France and Germany alone generated around a quarter of the recruiter’s gross profit before the pandemic. The acceleration in the vaccine rollout on the Continent and an upgrade by the European Commission to its growth forecast for this year and next bode well for further improvement in fees earned there. Germany is being targeted by management as one of its “large, high potential” markets because of the still-relatively low prevalence of outsourced recruitment — gross profits were up 26 per cent on 2019 over the second quarter.
But it was “diversification” that has proven its worth so far this year. Despite the effects of Covid-19 immature recruitment markets such as India and Brazil generated record gross profit growth during the second quarter. The Chinese economic rebound was evident in mainland gross profits that were more than a tenth higher than 2019.
Recruiters like Page have a high degree of operating leverage, which means that a rebound in fee income stands to turbo-charge profitability. Remote working meant lower entertainment and travel costs during the first half, leaving the cost base around 5 per cent lower than 2019 levels. A planned increase in headcount later this year will mean that starts to increase. But boosting staff numbers should be viewed as another green light for Page’s prospects — after all, recruiters are inherently people-based businesses.
There could also still be room for further profit upgrades later this year, according to Davy’s Dave Greenall. If the pandemic has convinced recruiters that flexible working and Zoom interviews should be here to stay, there is the potential for lower commuting and property expenses, he argues.
Like peers, Page has a solid track record in being highly cash generative, which has historically fed through to generous shareholder returns. After battening down the hatches last year also meant scrapping dividends, a payment of 12.8p a share is forecast by analysts for 2021. That is expected to rise to 17.2p in 2022, which at the current share price equates to a respectable potential dividend yield of 2.9 per cent. Those forecasts do not include special dividends, which Page has form in delivering. Even after spending plans, a considerable net cash pile of £168 million means that one-off returns might not be out of the question. Page has earned investors’ confidence.
ADVICE Buy
WHY The economic recovery should feed through to strong growth in profits
Ferrexpo
The resurgence in iron-ore prices amid a rebound in global demand has handed miners a clear win over broader UK stock market indices in the past 12 months.
Increased production of iron-ore fines and pellets by Ferrexpo, the Ukrainian mining group, during the second quarter should allow lofty pricing to be better captured through earnings and cashflow generation over the full year. Analysts forecast pre-tax profits of $1.2 billion this year, a 65 per cent rise on 2020.
Total commercial production was 2 per cent higher than the previous year at 2.9 million tonnes, benefiting from upgrade work being pushed out to the third quarter.
Ferrexpo produces high-grade iron-ore pellets that can be fed directly into blast furnaces, which can lower carbon emissions and improve productivity at steel mills. Producing pellets that contain either 65 or 67 per cent iron translates into a premium of $30 to $50 above the spot price, the company says.
A bullish market meant the group had swung to a net cash position by December and last month paid down its debt facility 18 months early. Peel Hunt analysts reckon that should feed through to bumper dividends this year, forecasting a payment of 66 cents a share, equivalent to a yield of more than 11 per cent at its current 434¾p share price and exchange rate.
Ferrexpo has delivered the highest total returns of all its peers on a one-year, two-year and five-year basis. Since the start of this year, it has generated a total return of almost 93 per cent. Yet its shares are also the most lowly rated, with a forward enterprise value/ebitda multiple of only three.
So what gives? Two things. Mining assets located in Ukraine carry a fair degree of political risk. But a recent history of corporate governance issues, largely relating to the former chief executive and 50.3 per cent shareholder Kostyantin Zhevago, could give cause for more caution. He stepped down in 2019 to focus on fighting embezzlement allegations in Ukraine. He maintains the allegations are without merit.
Holding the shares requires a strong stomach, and that’s before you get into the “commodities supercycle” versus “simple demand normalisation” debate.
ADVICE Avoid
WHY Corporate governance issues could pose further risks
