The business of recruitment can be brutal. The desire for fees is paramount and recruiters are the first to feel the brunt of an economic downturn.
Trading is highly cyclical as businesses usually put hiring plans on ice as soon as trading begins to deteriorate.
Recruitment companies generally don’t hang around to see if the market will improve. The second demand dries up, they start slashing jobs.
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However, recruiters are inherently asset-light, cash-rich and cash-generative businesses.
They don’t need to make big investments in infrastructure as their key assets are people – the consultants responsible for chasing leads and cultivating relationships.
These consultants are usually given an incentive by means of a commission based on the value and number of employees placed in roles.
Candidates placed on long-term, permanent contracts can generate both large one-off and recurring fees. Fees are usually calculated as a percentage of the role’s annual salary.
These qualities make recruiters excellent candidates for short-term trading around economic cycles.
They’re the first to feel the pain when economic activity starts to dry up, but they’re also the first to benefit when sentiment improves.
They can gear up to the recovery pretty quickly by ramping up hiring using income from fees to support growth.
If investors buy the stocks in these companies at the right price, a price that compensates for the risk – as low as possible – the stocks become highly leveraged economic recovery plays.
Recruitment freeze
All of London’s listed recruiters have warned about the state of the jobs market in the last few months. SThree (LSE: STEM), the global sciences, technology and engineering recruitment specialist, was the first of the larger players to report softer markets in December.
The shares plunged after the warning and are down 34% over the past six months compared with 23% for Robert Walters (LSE: RWA) and 18% for Hays (LSE: HAS).
Each company’s respective managers have responded by taking an axe to costs.
SThree has outlined £13 million of cost savings in its 2025 financial year, with £7 million of costs associated with the cuts. Hays cut costs from £80 million to £77 million in its second quarter, has put hiring plans on hold and plans further cost reductions.
Robert Walters has told investors it is implementing cost-control measures and operational productivity improvements to offset a lower headcount.
Cost control and productivity will be the name of the game for these firms in 2025 as they try to move ahead of the market.
There could be more pain to come over the next year.
Most European job markets are showing signs of stress. In the UK, a major market for all of these firms, businesses slammed the brakes on hiring in the wake of Labour’s tax-hiking budget. Job losses have followed since, as well as increasingly downbeat figures revealing the state of the economy.
It could be some time before these markets recover and recruiters feel the benefit.
As such, SThree, Robert Walters and Hays are not for the faint of heart. The shares could fall further before mounting a recovery.
However, as recruiters are usually the first in and first out of any downturn, investors who want to wait until the market turns may find they’ve left it too late.
Buy at, or near, book value
SThree, Robert Walters and Hays all have the makings of classic value recovery plays, and if investors can buy at, or near, their book value, the risk is greatly reduced.
The asset-light nature of the companies also means that book value tends to be mostly in cash, making it much easier to determine the base value of the business.
SThree, which was due to report its results around the time MoneyWeek went to press, is projected to end its 2024 fiscal year with around £70 million in net cash (excluding leases) on the balance sheet, according to the City, against its current market capitalisation of £375 million. Book value stands at around £244 million, putting the shares on a price-to-book (p/b) value of 1.5.
Hays is set to end its current financial year with £52 million in net cash (also excluding leases) against a market capitalisation of £1.2 billion. Adding in other assets, the stock is trading at a p/b of 2.2.
Robert Walters is the most interesting of the three. The company has experienced the biggest drop in demand for its services of the group, mainly due to its heavy exposure to the European and UK markets, and profit has evaporated.
In January, the company warned that, due to a double-digit decline in fee income from job placements, it would only break-even in 2024. But there’s lots of room for a recovery here.
After recent declines, the stock has dropped below 300p, a low not seen since the height of the pandemic. But around 25% of the group’s market value is cash (£53 million against £210 million). The stock yields 7.7%, assuming management maintains payouts from cash reserves.
Considering management’s plans to slash costs, Panmure Liberum has the company returning to profit (£5 million or 4.p per share) next year, even if net fee income stagnates.
And if the jobs market begins to show signs of life in 2026, the lower cost base combined with growth could help the firm triple net profit to £15 million (14.8p per share).
These estimates put the Robert Walters on a cash-adjusted forward p/e of around 15 and a p/b of around 1.5. This isn’t cheap, but it shows the scale of the recovery possible for these businesses.
I anticipate further pain for these companies in the near term, but for those investors who can look past this short-term pain, now could be the time to start buying in to the sector.
Robert Walters is the top pick, but a basket of all three could make the most sense to reduce risk.
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