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On March 5th the international recruitment agency will serve up its results for calendar 2012 and given that there was a detailed trading statement on January 15th – which flagged up that Q1 2013 would be challenging – it is hard to see there being any great horrors. However, at 425p, on a 2013 price earnings ratio of 26 (or more) there is not a lot of scope for disappointment. There is a bull case as well as a bear case and the debate is an interesting one.
The Q4 trading statement reported fees of £126.5 million which was marginally ahead of consensus. The UK market seems to have stabilised, Asia is trading strongly and Europe (this will not surprise you) not very strongly. On the back of that pre-tax profits should come in at around £65 million (down from £86 million in 2011) which equates to earnings of 14p (down from 18.2p). Net cash at the year end was basically unchanged on 2011 at £58 million.
Page flagged that Q1 would be challenging and also that it has capitalised £42 million of software development costs for a new system which it will start to roll out in 2013. That will result in an increased amortisation charge of £8 million (which the bulls will ask us to disregard) which will be offset by efficiency savings, such as the elimination of manual processing (which the bulls expect us not to ignore).
Looking forward the bull case is best put by Bank of America which assumes a 2% increase in fee income in 2013 ( Asia and emerging markets which accounts for 22% of group sales having a good year and more than offsetting Europe with the US and UK pretty much level) and a 15% increase in fee income in 2014. That would deliver earnings per share of 16.4p this year and 23p in 2014.
Bank of America, which has a target price of 450np admits that the PE is “high” but argued (at 404p) that “EV based multiples of sales (1.2x) and gross profits (2.2x) are still below through the cycle averages (1.4x and 2.4x, respectively).” In other words, if you accept that there will be a strong rebound in fee income in 2014 then the valuation is not yet discounting the fact that we are way off the peak of the cycle but are at the start of an upswing. But even a bull is only suggesting that from here there is 25p upside.
The consensus earnings forecast is just 15.6p this year and 20p next year. Most analysts are more cautious than Bank of America about Europe and also the speed of the recovery in Asia. I share that caution and would argue that the risks to earnings forecasts even ahead of the statement on current trading that will accompany the prelims next week has to be on the downside. Looking forward I can only see European business shrinking in 2013 and 2014 while I would regard the risks in the UK as also being on the downside. Even a modest shift in hiring patters from permanent to temp can on an operationally geared recruiter have a big bottom line impact.
If one accepts consensus the 2013 PE is 27, falling to 21.4. For a stock offering no dividend support ( the yield is just 2.2%) that is a terribly high rating to pay for a stock where there is a real question concerning earnings visibility and where there is scant evidence that 2014 will see a cyclical rebound in fee income that supporters expect and which the share price more than fully discounts.
If there is such a rebound in earnings the smarter way to play it is surely with a mid cap recruiter such as Interquest (ITQ) which offers a better yield and trades on a multiple of 5 and which – on a cyclical upturn would go straight into play as a takeover target. For more on Interquest click here.
Generally this is not a sector to chase. And on Michael Page, at 425p, I have to side with the bears.
