Interquest: poised to ride the next IT sector recruitment wave

It is not a secret that recruitment business is one of a cyclical nature; up when the economy is buoyant and down when otherwise. This can be felt most vividly by looking at latest financial reports of many recruiters, Hays’s in particular, a good market representative (39% of total UK recruitment market) – the recruitment giant suffered a reduction in net income of just over 43% in 2009! Hays, is sadly not the only major company whose fortunes are dimmed in the short term; no recruiter has escaped the impact of clients doing away with personnel expansion plans as a result of the feeble economy. There are, however, pockets of hope in the sector, and there are companies doing all the right things, while setting themselves up for a sharp move up when the economy finds its wheels.

According to ComputerWorld research, there are at least nine main skills which are set to see a soft increase in employer demand in 2H 2009: IT Technical Support, Programming, Project Management, Networking, Business Intelligence, Security, Web 2.0, Data Centre and Telecoms.

All of these skills are covered by London-listed Interquest (ITQ).

The London-based company was founded in 2001 and is currently leading its sector in IT/Technology recruitment (attractive sector to lead, as salaries are some 30% higher than average UK profession).

This sector leadership places Interquest in a good position going forward, as IT specialities are likely to suffer least during any recession, compared to other recruitment sub-sectors. Clients clearly realise the full value of Information Technology in maintaining their competitive edge - chopping staff too bravely in this department will lead to possible erosion of competitive base when the recession ends. The firms instead have been placing business for contract personnel to the detriment of permanent (visible when reading the latest Interquest report; the company’s contracted business is down by 7%, while permanent business has slipped by 53%).

Interquest is positioned operationally advantageously when contracted staff is needed. The company has always had a larger weighting in contract staff (80% of gross income in 1H2009, although margins are generally somewhat lower compared to permanent). This specialisation of Interquest can be easily appreciated when you consider the recent ITJobBoard report, which claims the IT recruitment market in the UK is 20% contract and 80% permanent. 

Interquest essentially comprises of a number of specialised recruitment units operating in their respective fields of expertise. In addition to above-mentioned skills, the company covers such disciplines as Investment Banking IT functions, Design and Web Development, New Media, SAP, Software Testing, Engineering, Analytics, IT storage. Each business unit develops own brand and specialises in own market niche, while benefitting from group infrastructure as whole.

Revenue in 1H2009 has come in at £49.2m (£53.4m in 1H2008), a reduction of 8%. The gross margin has decreased by a couple percentage points, as the proportion of contracted staff climbs. Operational leverage has caused diluted EPS in 1H2009 to equal 2 pence (4.6 pence in 1H2008).

Total Assets at 1H2009 stood at £32.6m (£38.8 at 1H2008). The drop is attributable to good will reductions, due to downward revisions of deferred considerations, related to earlier purchased businesses. A reduction in receivables of some £4m also contributes to reduced assets. Cash stood at £402k at 1H2009 (£148k at 1H2008). Total liabilities at 1H2009 stood at £13.5m (£21.4m at 1H2009). The main reduction driver here is a large drop in debt from £6.8m at 1H2008 to £1.8m at 1H2009. Liquidity is positive at Current Ratio of 1.23.

As a result of working capital movement cash from operations in 1H2009 came in at £4.6m (£3m in 1H2008). CapEx was negligible in 1H2009 (depreciation not covered). In June 2009 Interquest paid its maiden dividend of 1 penny a share to its shareholders, yielding just above 2%. 

Given Interquest’s cost of equity of 9% (Beta = 1.02) and low re-investment needs the stock currently appears valued too lowly. If you discount the current exceptional economic climate and look at long term intrinsic company value with net income levels in regular trading environment, Cenkos Securities’ target price for Interquest of 75 pence a share appears justifiable.

The main damper would be the fact that Interquest’s longer term income growing strategy is acquisitions-led. This creates reliance on due availability of acquisition targets, and these being up for sale at realistic prices.

Interquest appears to have a number of key advantages, including:

• Currently low gearing (Debt to Equity is 9.2%) allowing flexibility and access to £14m of debt facilities.
• Internal training academy produces tangible results in sales personnel education.
• Sector specialisms are fairly well-diversified.
• PowerCheck research found that employment has increased by 23% in the insurance sector and by 19% in the banking sector in 1H2009. Interquest’s exposure to financial services sector is some 20%, according to John East and Partners.
• Interquest’s London focus places the company where it is all at, so to speak. Greater London and the South East account for almost 60% of all IT recruitment needs in the UK. Shortage of qualified IT personnel will keep this recruitment sector buoyant in the long term.
• Interquest founded a division called IQEquity in 1H2009, which funds recruitment start ups (leveraging up the company’s industry experience). The success to date is apparent. There are four ventures in total: Lanborne Consulting headed by Ian Pratt in Slough (Interquest owns 70%), Lighthouse Testing, headed by Emma Gray and Scott Summers in Central London (Interquest owns 60%). Korus Recruitment, run by David Seear in Chester and Hayward’s Heath (Interquest owns 50.1%) and the latest edition is Sapian Solutions (no details as of yet have been disclosed).
• Directors own over 60% of equity.
• Another point of interest is that Gary Ashworth, Interquest’s Chairman and largest shareholder, also founded Abacus Recruitment (group of recruitment agencies, including 2 in Information Technology) in 1981 in a small room above a pub in the City of London. Abacus was then built up and sold to Carlisle holdings in 1998.

As a consequence of Gary’s earlier work, Interquest’s board can now enjoy much more attentive shareholders.