Like motor retailers (see earlier post) one of the areas of the market that suffered the biggest share price falls after Brexit was recruitment companies. This was not surprising as the companies are highly cyclical and mostly operate on thin profit margins making their earnings and dividends vulnerable in the event of a recession which the market feared.
Unlike the motor retailers some of the recruitment companies have rallied strongly in the last 6 months but there has been a massive discrepancy in performance that provides opportunities in the smaller companies, many of which continue to languish. The larger companies (the 3 biggest are Hays, Page Group and S Three) have significant international operations that have continued to trade well and, importantly, have benefited from the 20% decline in sterling since Brexit. For all 3 of the larger companies the UK is only about a quarter of overall operations and so the strength of the international operations has offset any slowdown in the UK.
Since Brexit all 3 large companies have reported that the UK has been impacted by the uncertainty caused by Brexit, especially in the public sector (note what has happened to support services companies like Capita and Mitie here where they both announced profit warnings) and finance related recruitment such as accountancy, banking and property (esp. in London).
The robust trading of the larger companies has led to a sharp rally in both their share prices and valuations. Hays, Page and SThree are now trading on 17x, 19x and 16x PE respectively although reasonable dividend yields are available. For the smaller companies in the sector, and there are many, it is a different story and many have rock bottom valuations and have not yet participated in the rally.
The best way to look at the sector is through this link to the employment services sub-sector that provides a summary of their Stock Ranking:
http://www.stockopedia.com/sectors/professional-commercial-services-52203030/
As you can see there is a dichotomy in the sector with some stocks on depressed valuations and low momentum and others (mainly but not exclusively larger companies) where the opposite is true.
The question is whether the market is being efficient and ascribing higher valuations to the companies that have larger overseas exposure and operate in sectors within the UK that are less exposed…
Re Gattaca (LON:GATC) today, which is up 9.3% at the close. 1.79m were traded in a free float of just 17.2m i.e. over 10%. That is an extraordinary level of activity. Do I smell a takeover coming?
