PageGroup 'fragile' but shares fly

A stream of economic data suggests the UK has so far ignored the risks of Brexit, yet confidence in the UK recruitment sector is "fragile", with large firms delaying hiring. Still, recruiter PageGroup's third-quarter results beat expectations, forcing analysts to upgrade forecasts.

There are serious concerns about the highly cyclical industry post the EU referendum, with multi-national firms putting off decisions on manpower - especially permanent staff. And gross profit did slip 4.7% to £37.8 million in the quarter, as a 14% slump in financial services easily cancelled out 22% growth in technology business.

But buyers chased the share price up almost 5% to 365p Tuesday, and HSBC analyst Matthew Lloyd has upgraded his target price by 20% to 385p.

"We have been cautious with numbers, but the mix is encouraging; it suggests pockets of weakness and some real strength elsewhere," he says.

The weak pound will boost gross profit by about £45 million in 2016 and operating profit by £10 million, we're told. HSBC now expects annual revenue to reach £1.2 billion, with pre-tax profit of £94 million giving earnings per share of 21.39p. This puts the shares on a price/earnings (PE) multiple of 18 times, premium to Robert Walters, Hays and SThree.

"With the prevailing uncertainty in the UK, the challenges in some of our other larger markets and the unpredictable nature of the current cycle, we remain cautious in our short-term outlook," admitted chief executive Steve Ingham.

"However, we will continue to progress our strategic projects, such as our European Shared Service Centre, as well as driving profitable growth and taking advantage of growth markets."

UK isn't everything

And the sluggish UK market isn't indicative of the entire sector, with investment in the German division accelerating a regional 16% jump to gross profit at constant currency in a record quarter. This supported group gross profit growth of 1.3% to £158.6 million, up 14% on a reported basis, the bulk of which is from Europe, Middle East and Africa (EMEA).

Its largest operaton, France remained highly profitable by growing earnings by 4%. Double-digit EMEA profit growth to £66.8 million was also supported by improving profitability in the Netherlands and Southern Europe. Oil and gas weakness and ongoing political instability pulled profit down 2% from the Middle East and Africa, however.

"German growth is a real positive, as it points to Page gaining a certain critical mass in this key market," says Lloyd.

Page's net cash up to £100 million easily funds tomorrow's £31.7 million interim dividend Challenges in America and Asia Pacific also weighed on profits, thanks to macro concerns in China. Latin America profits jumped by nearly a quarter, despite Brazil's -12% slip-up.

With a 75:25 mix, PageGroup relies on permanent job recruitment for the bulk of its profits. However, sluggish growth rates reflected just a 1% jump in permanent gross earnings at constant currency, while the temporary arm grew 2% to £39.1 million.

"The variation in these growth rates between permanent and temporary recruitment continued to be driven primarily by uncertainty in some of our markets, leading to a lower number of permanent positions being filled and an increase in the hiring of lower-risk temporary positions," said the group.

PageGroup is kitted out with a strong balance sheet, with net cash up to £100 million, which easily funds tomorrow's £31.7 million interim dividend payout.

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