- Rate of decline in net fee growth does not improve in final quarter of year
- Recruitment specialist admits to 20% shortfall in profits relative to forecasts
- Difficult conditions expected to persist
- Shares in PageGroup and Robert Walters dragged down too
“A profit warning from recruitment agency Hays raises questions over the strength of the economies in its target markets, even if jobs and employment tend to be lagging rather than leading indicators,” says AJ Bell investment director Russ Mould.
“Weakness in temporary and permanent posts in all four geographic markets does make for depressing reading and management’s suggestion that trading will remain difficult suggests that Hays is going to extend its streak of nine consecutive quarters of falling like-for-like fee growth.
“This helps to explain why Hays’ shares now languish at thirteen-year lows after Thursday’s sharp fall, especially as management’s 20% cut to profit forecasts for the year to June 2025 is likely to prompt deep reductions to estimates for the new financial year to June 2026.
“Going into this unscheduled trading update, analysts had already been expecting a big drop in operating profit to £56 million from £105 million. Management now expects £45 million and analysts’ forecasts for a rebound to £75 million in 2026 are looking exposed on the downside, even as Hays looks to cut costs where it can.
“A percentage downgrade to 2026’s numbers to match that of 2025 would take estimates down toward £60 million and even that could be optimistic unless the rate of decline in fee growth eases. Either way, profits look set to undershoot even those generated during the Covid-blighted financial year to June 2021.
Source: Company accounts, Marketscreener, consensus analysts' forecasts
“Like-for-like fee growth first went negative in the final quarter of the year to June 2024. The only good news about the final quarter of the year just ended is the rate of decline was the same for Hays as a whole.
“Permanent posts remained weak, but so did Temporary, too. This does hint at a lack of corporate confidence, even employers are reluctant to add even temporary hires, and the first signs of any recovery should come here first.
Source: Company accounts
“The good news is that Hays’ balance sheet is strong. At the first half stage, it had £154 million in cash, against £125 million in borrowing and £167 million in leases, for an all-in net debt position of just £138 million, compared to shareholders funds of £483 million. Even knocking off £231 million in intangibles means the group has tangible net assets of £262 million so the gearing level is not unduly high.
“That said, further dividend cuts cannot be ruled out, given the weak profit trajectory and how this is likely to crimp free cash flow, and the days of share buybacks look to be well and truly behind us.
Source: Company accounts, Marketscreener, consensus analysts' forecasts
“More adventurous, contrarian investors may, however, start to wonder whether the latest trading alert and share price slide represent an opportunity to step in.
“Forward price/earnings ratios of more than 70 for the year to June 2025 and 35 for June 2026, depending upon quite where earnings per share estimates settle, hardly catch the eye.
“But value-seekers will argue that is the point.
“They will look to buy cyclical firms’ when earnings are depressed (and thus valuation ratios at their highest and least attractive), in the view that profits will rebound one day, unless the business model is broken or obsolete, and take the share price with it.
“Hays’ net income peaked at £166 million in the year to June 2019. Hays’ current stock market capitalisation of £980 million represents barely six times that sum and anyone who believes the combination of cost efficiencies and a cyclical upswing will see profits return to former glories may find that a tempting prospect, even if they will probably have to be patient.
Source: Company accounts, Marketscreener, consensus analysts' forecasts
