Good morning! It's been a good year generally for shares in recruitment groups, as they have re-rated due to recovering economies in the UK and US. Hydrogen (LON:HYDG) has been on my watchlist for almost a year now, and looks reasonably good value on the Stockopedia traffic light graphics (see below), with a forward PER of 11.3, and an attractive dividend yield of just over 4%.
So let's have a look at Hydrogen's trading update this morning for the year ending 31 Dec 2013. It's a mild profit warning. The reasons given include the cost of an additional 10% sales headcount, foreign exchange losses from the recent strength of sterling, and fee income "marginally lower than projected" in Nov & Dec.
Helpfully, they quantify the profit shortfall (always a good idea, as the market hates uncertainty), expecting H2 profit before tax to be £0.3m lower than H1. So looking back at the H1 results, they made £1.3m profit before tax, so that implies a full year result of £2.3m.
Basic EPS was 4.26p in H1 (H1 2012: 6.13p), so adjusting that by 1.0/1.3 gives us about 3.3p EPS in H2, or just under 7.6p for the full year. That's about 10% below the broker consensus of 8.42p shown on Stockopedia, so it's a moderate profit miss, not really anything to get terribly excited about. It's likely to take about 10-15% off the share price today, I would imagine.
The outlook statement sounds upbeat for 2014, but seems to contradict the rest of the statement, saying;
Activity levels across the Group in the lead-up to the year-end remain strong. The Board remains confident in its strategy to grow the business, and believes that the investments made in 2013 leave it well placed to benefit from market opportunities in 2014.
I don't quite understand how they can say that activity levels remain strong, when they have just reported softer than expected Nov & Dec trading? Surely those statements are contradictory?
The UK economy is already recovering, so really Hydrogen should really be reporting profits rising, not falling, so that puts me off somewhat. It perhaps suggests that they might be struggling with competitive pressures. After all, there is little to separate one employment agency from another. In my experience…
