Recruitment companies: Another interesting sub-sector, esp. the smaller ones?

Monday, Jan 16 2017 by

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:

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…

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Gattaca plc, formerly Matchtech Group plc, is a human capital resources business dealing with contract and permanent recruitment in the private and public sectors. The Company operates through two segments: Engineering and Technology. The Engineering segment comprises Barclay Meade and Alderwood recruitment consultancy brands. The Technology segment includes the Connectus recruitment consultancy brand. The Company is a provider of specialist recruitment services to the engineering and technology industries, both in the United Kingdom and internationally. The Company offers three core solutions: Contingent Workforce Solutions, Permanent Recruitment Process Outsourcing (RPO) and Total Workforce Solutions. more »

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Hays plc is a recruitment company. The Company's segments include Australia & New Zealand, Germany, United Kingdom and Ireland and Rest of World. It works on various specialisms including accountancy and finance, information technology, life sciences, construction and property and engineering, supporting the career development of candidates with temporary, contracting and permanent jobs. It works on one-off placements for small-to-medium enterprises and global multinationals, as well as contract-based recruitments for its clients. The Company has its operations in over 250 offices in 33 countries. It serves various sectors including, accountancy and finance, construction and property, engineering and manufacturing, human resources, office professionals, Education and Telecoms sector. more »

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PageGroup plc, formerly Michael Page International plc, is engaged in the recruitment consultancy and other ancillary services. The Company's segments include EMEA, United Kingdom, Asia Pacific and Americas. The Company is organized into approximately three brands operating at various levels of the market: Michael Page, Page Personnel and Page Executive. Page Executive offers executive search services. Page Executive offers a range of search, selection and management solutions for organizations. Michael Page recruits on a permanent, temporary, contract and interim basis. Page Personnel offers specialist recruitment services to organizations requiring permanent employees or temporary or contract staff at technical and administrative support, professional clerical and junior management levels. The Company's subsidiaries include Michael Page International Argentina SA, Page Personnel Argentina SA, Michael Page International (Australia) Pty Limited and Michael Page International GmbH. more »

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  Is LON:GATC fundamentally strong or weak? Find out More »

16 Posts on this Thread show/hide all

CMWilliamson 16th Jan '17 1 of 16

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?

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tscott 16th Jan '17 2 of 16

It is only 52% free float but certainly a good time for a bid given the shares are so low. Of today's volume 1.4m were sales which probably reflects a large seller clearing stock but it will be interesting to see any LSE announcement re share holidings

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herbie47 16th Jan '17 3 of 16

In reply to post #167026

Most recruiters are up today, Staffline (LON:STAF) up 8%, seems to be to do with a report:

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crazycoops 16th Jan '17 4 of 16


It is interesting to consider the whole sector but small recruiters are a very fragmented bunch and those focused just on the domestic market will thrive or suffer depending on the sector(s) they serve. What I like about Gattaca (LON:GATC) - exposure to tech sector and expanding into US market, low p/e, high divi - does not apply to the recruitment sector as a whole, where I think low p/e is often justified. My view is that Gattaca (LON:GATC) could/should have sufficient resilience to justify a higher rating. If the p/e doesn't rerate, there is a lovely yield anyway which should be sustainable. I don't think the same can be said for the whole sector, although I concede there might be other good plays around. Both Staffline (LON:STAF) and Empresaria (LON:EMR) are frequently discussed around these parts. I have looked at both and neither give me the same confidence as Gattaca (LON:GATC).

Just my two cents!

Blog: Share Knowledge
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Maddox 18th Jan '17 5 of 16

Hi Ted,

Great article. I'm in STAF and GATC. Particularly liking GATC, has been on a yield of c. 10% recently and been looking like a classic contrarian play with high quality (83); high value (97) scores; but very low momentum (10) (courtesy of Stockopedia Styles). The last results appear reasonable with a challenging UK market off-set by international - so looking very miss-priced.

Regards Maddox

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tscott 27th Jan '17 6 of 16

I see one of the small companies that has been left behind, RTC, has had a good trading update today. The shares are up by a 1/3rd which reflects the low valuation and bearish expectations for such businesses at the moment. Other such stocks should also bounce strongly when they announce their updates.

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herbie47 27th Jan '17 7 of 16

In reply to post #169057

Not all are bouncing, Staffline (LON:STAF) was down after it's recent update, another one last week who's name escapes me was also down. Brexit has not really started yet, so I think the falls were premature.

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Bushranger 27th Jan '17 8 of 16

In reply to post #167044

I too like Gattaca (LON:GATC). I hold a small amount. Trading updates seem to be close to 28th Jan each year so I am expecting a trading update on Monday or early in the week. @herbie47 Re Staffline (LON:STAF). they brought out a trading update early Jan. and the share price rose well off the back of that until the actual results. So share price pegged back a little.

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herbie47 27th Jan '17 9 of 16

I hold Gattaca (LON:GATC) and Staffline (LON:STAF), planning to sell Staffline (LON:STAF) soon until Brexit becomes clearer, seems the actual results were not as good as maybe the update led people to believe. Hopefully Gattaca (LON:GATC) will bounce after results as I'm well down. Only have small positions in both. Not a sector I want too much exposure to at the moment.

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Bushranger 27th Jan '17 10 of 16

In reply to post #169078

I heard a fair comment the other day ref the drop in BT share price that the "market is high but hollow". This observation could also be used to explain why reasonable updates seem to get a muted market response and anything less gets hammered?

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tscott 27th Jan '17 11 of 16

With regard to BT although the focus was on the fraud in the Italian division I think the main reason for the fall was the warning about its public sector work where the market is extremely skittish. Other big stocks like Mitie and Capita have had bad profit warnings for similar reasons and even those that have not, like Carillion, have seen their share price under severe pressure because of exposure to public sector contracts where margins are very thin and it is easy to lose business because of government cut backs. Another reason for BT's weakness and others like Carillion is because of the amount of debt on their balance sheet, esp. if pension deficits are included which could threaten dividend payments further ahead.
In the staffing sector those companies which are exposed to public sector work are more vulnerable so it is important to differentiate between them.Also, financial work is more fluid at present because of cut backs in the City. I notice Staffline is still about 25% ytd even though it fell on the day of the results.

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herbie47 27th Jan '17 12 of 16

In reply to post #169084

Yes I have noticed a lot of inline updates shares are falling quite a bit. Unless it's better than expected people are selling.

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tscott 1st Feb '17 13 of 16

Staffline up 5% today helped by Questor recommendation in Daily Telegraph

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Bushranger 1st Feb '17 14 of 16

In reply to post #169822

Gattaca (LON:GATC). results out tomorrow. So I am hoping for some upward movement in the SP if positive.

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tscott 2nd Feb '17 15 of 16

Hi Bushranger. The share price reaction to Gattaca's trading update was mildly positive after initially being marked down. I think value shares are out of favour with the market at the moment and there are quite a few shares where the PE and yield are similar numbers (note the reaction to a positive announcement by Carillion today which is a 250 stock). Although Gattaca said that it expects results to be in line with expectations the numbers have been downgraded by analysts since last summer so the market may expect further downgrades. There is a comment on Gattaca today on the Share Prophet website as well as Paul Scott's comments here. The volume was also quite high today suggesting institutions could still be reducing long term holdings when there is a bit of liquidity available. However, I think the lukewarm reception to shares like these is that growth and momentum stocks are more popular and investors are giving up on boring value stocks that do not respond to either low valuations or reasonable corporate news. However, that will change and now is the time to accumulate such shares on weakness.

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peterclothier 16th Mar '17 16 of 16

I like Gattaca GATC and had a position at 295 which I sold for a small loss. The seller still seems to be there, I'm going to wait to see if it can break 300 properly.
I bought some Impellam the day after their recent results. Not as cheap as GATC, and they have gone pretty much flat sideways recently, but look like they might be able to have a crack at their highs. In terms of relative strength and how close to recent highs it looks a leader of the smaller ones.

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