PageGroup: is it time to recruit this FTSE 250 stock?

As I’m hunting around for good value, cash-generative businesses, recruitment stocks keep coming up on my radar. They seem cheap at first glance and offer attractive dividend yields. Many of them have balance sheets loaded with cash.

On the other hand, these cyclical stocks are clearly out of favour and face an uncertain outlook right now. Several have issued profit warnings in recent months.

Should I stay away from this niche sector of the market, or are these firms offering me an opportunity to lock in some attractive income and profit from an eventual upturn? I think there are opportunities here, but the situation probably requires a little explanation.

Many recruiters are coming off a record couple of years when inflation and staff shortages caused profits to surge. That process is now unwinding. Big tech and finance companies, in particular, have been laying off thousands of staff in recent months.

The US has been particularly hard hit, but other global markets are also affected. Intuitively, it might seem like the wrong time to consider buying shares in recruitment firms. Surely things are only going to get worse?

Well, perhaps – at least in the short term. But the stock market always looks ahead, and recruitment stocks in particular are generally seen as a leading indicator of the wider economic outlook.

The chart below covered the period from August 2006 up to today and shows how shares in the four biggest listed recruiters on the UK market have already sold off heavily. In many cases, these shares are trading at lows that remind me of the levels hit in 2009,2016, and 2020:

My investment thesis today might be to buy one or more (perhaps a basket) of recruiters, taking the view that they are probably cheap on a cyclical view.

However, in the short term I would be prepared to accept more volatility. I don’t think the downgrade cycle is over yet. In my view, there’s a good chance we’ll see earnings fall more sharply over the next 6-12 months, before perhaps starting to recover.

Of course, I could be wrong. The world’s major economies may avoid a recession. But even if things do get worse, I think much of the downside is already priced in. Most of these recruiters are carrying net cash and have weathered many such previous cycles.

What’s more, when the economic outlook does turn positive again, history suggests recruiters will be among the first to rally.

I don’t see any reason to believe that underlying demand trends will suddenly change, especially in professional markets. Sectors such as banking and accountancy have always suffered cyclical swings. They’ll come back at some point.

Technology has also proved to be somewhat cyclical, but I think it’s probably safe to assume that so-called STEM sectors – science, technology, engineering and mathematics – are likely to see continued structural growth on a medium-term view.

Meanwhile, ageing workforces and skill shortages in areas such as languages are also creating pockets of opportunity. In its recent half-year update, Robert Walters (LON:RWA) reported 1.3 jobs per professional in Tokyo – Japan is the group’s most profitable market.

Choosing the best recruiter to buy isn’t necessarily easy. Over the timeframe highlighted in my chart above, Robert Walters and PageGroup have outperformed significantly.

While investors with good timing may have made bigger gains on Robert Walters, this has come at the expense of far greater volatility.

PageGroup also has a strong record of long-term growth and – in my view – could be a less risky way to gain exposure to the next upcycle.

Pagegroup (LON:PAGE)

Not many people get to see their surname become their stock exchange ticker. PageGroup co-founder Michael Page started the business in 1976 in a flat above a London laundrette.

Today it’s a FTSE 250 business with over 9,000 employees and operations in 37 countries.

Summary

• PageGroup has a track record of continued steady growth over many economic cycles

• The company currently had net cash of nearly £100m at the end of June 2023, providing a certain margin of safety

• Recent guidance from the firm is for full-year profits to be in line with current expectations

• The company’s share price has already fallen by 30% from its 2021 highs, perhaps suggesting that a typical downturn is now priced into the stock

• However, earnings downgrades have been fairly modest so far and it’s fair to assume that profits may have further to fall

• The group’s headcount is still elevated compared to pre-pandemic levels and may need to be cut further. In the meantime, the productivity of fee earners has fallen

• This is a cyclical business and share price action can be volatile over shorter periods

Profile

About the stock

PageGroup operates in the Industrials sector and is part of the Professional & Commercial Services industry group.

The group floated on the Unlisted Securities Market in 1983 and was admitted to the London Stock Exchange in 1988. Today it’s a FTSE 250-listed business with a market cap of £1.5bn and a recent share price of 450p.

The StockRanks show a high quality score and strong overall ranking for PageGroup, highlighting above-average quality metrics and a seemingly reasonable valuation:

PageGroup shares rallied strongly through the pandemic period, as recruitment activity and wages surged in the professional sectors served by the business. However, the shares have now pulled back and are trading in line with pre-pandemic levels:

About the opportunity

PageGroup has a long track record of growth through economic cycles.

Source: PageGroup FY22 presentation

History suggests that buying the shares during a downturn is most likely to provide an opportunity to enjoy market-beating returns.

The company’s dividend policy is:

“To maintain the ordinary dividend through downturns and to increase it during more prosperous times”

By and large this has been achieved over the last 20 years. While payouts were skipped during the pandemic, they’ve since been recovered through special dividends:

This gives me some confidence that PageGroup’s current ordinary dividend of 15.9p per share may be sustainable, giving an initial yield of 3.5%, with the potential for future growth. This week's news that the company will pay a special dividend in addition to its ordinary half-year dividend strengthens my view that this payout is likely to be safe.

Broker forecasts currently suggest profits will fall this year, before returning to modest growth in 2024. Although past performance is no guarantee of future returns, I feel this could be a suitable opportunity to benefit from PageGroup’s next growth phase, when it comes.

Business & Model

What is the company’s history and what does it do?

PageGroup was founded by Michael Page and Bill McGregor in 1976. The company quickly became known for providing finance and accounting professionals.

The group has since expanded into a range of other commercial sectors. It now operates under four main brands. These span the executive, professional and clerical segments of the market and also include a dedicated outsourcing service:

Key business segments and revenue breakdown

PageGroup’s business segments are broken into four high-level disciplines.

• Finance: accounting and financial services (FY22 gross profit: £344m)

• Professional services: technology, legal, HR, secretarial, healthcare and life sciences (FY22 gross profit: £335m)

• Technical: engineering, property, construction, procurement and supply chain management (FY22 gross profit: £252m)

• Marketing, Sales and Retail (FY22 gross profit: £146m)

PageGroup operates in 37 countries, but the group’s largest geographic region is Europe, the Middle East and Africa (EMEA):

What is the business model? How does it make money?

Recruiters earn fees from clients (employers) by supplying qualified candidates to fill permanent and temporary positions.

Temporary recruitment tends to be more resilient in a downturn, as employers can react to operational needs without having to commit to permanent employment.

PageGroup’s origins are in permanent recruitment, but the group generates around a quarter of gross profit from temporary placements today. Unsurprisingly, management reported “stronger growth in temporary recruitment” in the firm’s second-quarter update:

Markets & Competition

What is the state and size of the company’s market?

The global recruitment market is large and growing, but conditions vary in different markets. For example, in the UK, Page says that “the majority” of vacant positions in the group’s target markets are outsourced to recruitment firms.

In contrast, Germany – another important market – has a quite different culture, with only 30% currently outsourced. Poland, Turkey and Africa are all also highlighted as less developed markets where there’s limited competition for professional recruitment services.

Asian markets are also said to be under-developed and offer “attractive opportunities” at good margins.

Although the US market is well developed in terms of outsourced recruitment, Page says there is “limited national competition of any scale”.

Who are the company’s key competitors?

PageGroup competes against local recruitment companies in all of its main geographic markets. In the UK, competitors we might recognise include Robert Walters, SThree, Manpower, Randstad and Hays.

As I mentioned above, An additional source of competition (and growth opportunities) is the traditional in-house recruitment model, where employers recruit directly using in-house staff.

How does it derive its competitive advantage?

PageGroup believes its geographic reach and breadth of professional specialisms provides a “real competitive advantage”. The group’s brands are well-known and probably represent an intangible asset. They are long-established in many high value professional markets, such as financial services, law and IT.

In an effort to maintain and extend these advantages, the company has made a significant effort over the last 15 years to increase its exposure to markets with greater growth potential or higher margins:

Expanding the firm’s reach in this way may help to develop network effects; international companies might prefer to work with recruiters who can match their geographic footprint.

PageGroup’s scale and financial strength may also provide other competitive benefits, by allowing the group to remain well-positioned to respond quickly when market positions improve.

Is the competitive advantage durable?

PageGroup is a services business where the main assets walk out of the door every night. Starting a rival firm isn’t difficult and does not require much investment.

However, this company has been in business for more than 45 years. I think its scale, track record and brand probably do provide some level of durable competitive advantage, especially with larger, higher-value clients.

Financially, Stockopedia shows us that the group generates consistently high returns on capital and equity. These are often an indicator that a business may benefit from durable competitive advantages:

Financials & Ownership

What is the record of growth and profitability?

Stockopedia’s data shows us that PageGroup has generated a very strong record of profit growth over the last decade:

However, digging into the historical accounts reveals that operating profit peaked at around £150m in 2007 before crashing down to about £21m in 2009. This highlights the inherent cyclicality in this business.

I don’t expect such a dramatic reversal this time round, though. PageGroup reiterated its full-year guidance with its half-year results this week. Broker forecasts suggest that operating profit will fall by around 30% to £135m this year, from last year’s high of just under £200m.

From 2024 onwards, a gradual recovery is expected, although of course this could be subject to revision.

Profitability: I’ve already touched on the company’s profitability, but looking back over the last decade we can see that return on capital employed has been fairly stable as the group has grown.

This seems to suggest that PageGroup has been able to deploy additional capital at consistent rates of return – a potentially attractive characteristic:

Is there evidence of historic share dilution?

PageGroup has not issued a significant number of shares in the last decade. Indeed, my research suggests the firm has not needed to raise equity for at least 20 years.

I don’t think shareholders need to be concerned about dilution.

What is the ownership of the company? Does management have stakes?

PageGroup’s main shareholders are all institutions. The group’s largest investor is UK asset manager Liontrust.

Current chief executive Nicholas Kirk only started work this year, so I can’t check the annual report for details of his shareholdings.

Kirk’s predecessor, Steven Ingham, owned 533k shares at the end of 2022, giving a comparatively modest £2.4m shareholding (at the current share price). This compares to his total remuneration of £2.3m in 2022.

I don’t think share ownership is the primary motivator for senior management, but it’s worth noting that PageGroup has a culture of long-serving leadership. Steven Ingham was appointed as CEO in 2006 and was only the company’s third chief executive.

Valuation

How does the relative valuation compare versus industry and sector?

PageGroup is trading at comparable levels to the broader Professional & Commercial Services industry group.

While the company’s P/E valuation is slightly higher, Page’s trailing 12-month valuation multiples look more favourable, perhaps reflecting falling earnings expectations:

When compared to its main listed recruiter rivals, I think PageGroup looks reasonably priced…

… especially when we consider the group’s superior profitability:

On balance, I think PageGroup looks fairly priced at the moment, based on recent performance and the latest management guidance.

Trends & Catalysts

Are there any significant macro trends the business is benefiting from?

While short-term macroeconomic trends may be unfavourable, I believe PageGroup is benefiting from a broader structural trend towards using outsourced recruitment services in most major global markets.

As I discussed earlier, penetration levels vary widely, even in comparable markets (e.g. UK and Germany).

However, I believe the growing sophistication of recruiters’ services and employers’ search for cost efficiencies is likely to drive continued outsourcing over the coming years.

Are there any catalysts that could drive a rerating in the medium term?

Recruitment’s cyclicality means that re-rating is likely to be primarily driven by signs that the wider economy is returning to growth.

As a business, PageGroup already appears to be stable, performing well, and in good financial health. So I don’t see any likely catalysts to drive a company-specific re-rating.

Risks, Threats & Hurdles

I can see several risks that could affect PageGroup’s future business prospects or valuation.

Macroeconomic risks: if the world’s major economies suffer a slowdown that is deeper and/or more lengthy than expected, PageGroup’s profits and share price could fall further.

More broadly, if the firm responds incorrectly to changing macroeconomic circumstances, it could find itself financially weakened in a downturn, or unable to compete effectively in an improving market.

Competition: as PageGroup seeks to expand into new and evolving markets, such as China, the group could face new and different competitive pressures. These might include political and regulatory pressures that could reduce profitability.

IT/cyber security/data protection: three of the top 12 risks listed by PageGroup in its annual report relate to IT. A serious failure in any of these areas, especially if it involved client data, could lead to client losses, legal liability and serious reputational damage.

Reputational risk: this is a people business that relies on its reputation and brands. A major adverse event could damage this reputation and make it difficult for the company to attract and retain high-quality staff.

Strategy/service positioning: it’s possible that PageGroup could miss important future trends in recruitment and fail to offer a contemporary, timely or competitive service.

Recent Trading & News

PageGroup’s recent trading has been relatively strong and – more importantly – consistently in line with expectations.

7 August 2023: half-year results show pre-tax profit down 45% to £63.3m, but reiterate that full-year results are expected to be in line with previous guidance.

Net cash remains high, at £98m and management underscore their confidence by increasing the ordinary interim dividend and declaring a special dividend of 15.9p per share (£50m).

Trading so far this year is said to have been mixed, with “tough market conditions” in Asia, the UK and the US. Both candidates and clients are said to be suffering from a loss of confidence. As a result, even where opportunities are available, candidates are sometimes reluctant to accept due to fear of the last in, first out phenomenon.

However, PageGroup says that “candidate shortages” and “good levels” of vacancies remain, despite the “high level” of macroeconomic uncertainty.

The firm says it is continuing to benefit from “investments in innovation and technology”.

Sentiment & Outlook

What do the brokers currently think and are they upgraded estimates?

Earnings forecasts for PageGroup have drifted lower over the last 12 months, but downgrades have not been particularly severe. I believe this reflects accurate guidance from management in addition to a fairly resilient operational performance.

Stockopedia’s data show FY23 earnings estimates have fallen by c.10% over the last 12 months.

Consensus estimates for FY24 earnings have been cut by 12% over the same period.

What would the person selling to us be thinking and who are they?

PageGroup shares have traded within a fairly limited range over the last year. As already discussed, I think the valuation looks reasonable based on the information available today.

As a result, I would suggest a couple of potential reasons for investors to sell at the moment:

• Fear of a worsening macroeconomic outlook

• Better near-term investment opportunities available elsewhere

Conclusions

From a medium/long-term perspective, I think PageGroup looks like a good quality, reasonably priced business.

The firm’s cash-rich balance sheet, dividend track record and lack of historic dilution give me confidence in the resilience of this business during a downturn.

PageGroup’s valuation may yet become more compelling – it’s impossible to be sure. However, it’s worth remembering that stock markets are forward looking and recruiters tend to be a strong leading indicator of a recovery.

I think it’s reasonable to expect that PageGroup shares may start to recover even while the wider external outlook remains uncertain.

On balance, I think PageGroup stock looks attractive at this point in time.