Personnel sector: Attractions of Harvey Nash, + potential at Staffline, Empresaria

4th Jun '18 by Edmund Shing

2 comments 3973 reads

Why look at the Personnel sector?

This is not in general a sector that fits my personal style of trading, given its traditionally very cyclical nature and also typically low profitability (as measured by operating margins).

But, the very cyclicality of the personnel sector can also give rise to contrarian value opportunities from time to time, as the sector can fall very much out of favour.

Today, I think that this sector has a lot going for it: Brexit (in whatever form it finally takes) is very likely to weigh on the ability of UK-based companies to recruit suitably-qualified employees, given that Brexit was largely about "taking back control of immigration".

Note that this does not mean stopping immigration to the UK, merely controlling it as opposed to having open borders for any EU citizen to come and work freely in the UK.

In the short-term, the Brexit vote is already having a significant effect on EU immigration, judging by latest statistics which demonstrate that Eastern Europeans in particular (from Poland, Romania and Bulgaria) are not coming to the UK in anything like the numbers they were prior to the referendum vote.

1. UK immigration from EU falls

There have been reports of staffing pressures already arising in the National Health Service and in agriculture as a result of lower EU migration to the UK. At the same time, UK employment has reached a historic high of 75.6% of the 16-64 population, as of February this year (Chart 2).

2. Record UK high employment

Source: ONS

This is the result of continual improvement in the overall employment market over the last year including a sharp drop in unemployment, as per Chart 3.

3. Quarterly and annual changes in UK employment

Source: ONS

Certain staffing companies are doing very well as a result of this tightening labour market, notably companies such as Harvey Nash (LON:HVN), in which I have a substantial shareholding.

Harvey Nash is a classic Value-Momentum stock as per the Stockopedia ranks, with a 92 rank for each factor:

4. Harvey Nash ranks high on Value + Momentum

With rising consensus EPS estimates and a consensus…

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john652

4th Jun '18

All these stocks seem to be afflicted by the generally negative view on uk stocks, I hold Empresaria (LON:EMR) and sure there are challenges but a pe of 6.1 for an international recruiter seems too cheap for me.

Mark Simpson

The problem with these sort of businesses is that the staff end up taking the lions share of the returns. You can see this with Harvey Nash (LON:HVN) as they have generated good top line growth yet this hasn't appeared consistently in the bottom line.

However there are signs that this might be changing with Harvey Nash (LON:HVN). DBAY Advisors picked up 26% in the market last year. Probably best known in the UK small cap area in the last few years for taking over marketing group Creston at the end of 2016. I suspect the implicit (or maybe even explicit) threat from DBAY is that either Harvey Nash (LON:HVN) management get their admin costs under control and stop taking all the returns from incremental growth or DBAY will take them over and kick them out. I think this is why we have seen the bottom line start to improve over the last year or so and management are starting to talk up the prospects rather than talk down their profitability.

Aside from the issues regarding who is getting the bulk of the returns I like Harvey Nash (LON:HVN) a lot - their balanced mix of permanent, temporary recruitment plus outsourcing gives them very balanced returns through the cycle. It is this stability that I think probably deserves a slight premium rating over the sector - at least now DBAY are enforcing some cost discipline on management.

Personnel sector: Attractions of Harvey Nash, + potential at Staffline, Empresaria

Why look at the Personnel sector?

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Edmund Shing

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