A flurry of trading updates has prompted Deutsche Bank to abandon its bearish stance on the recruitment sector.
The bank has moved from ‘sell’ to ‘hold’ in its rating for the two big London-listed recruiters, Hays Group PLC (LON:HAS) and PageGroup PLC (LON:PAGE).
- Read PageGroup's profits to be at top-end despite UK travails
- Read Hays awash with cash after strong quarter
So, what’s changed?
Recent macro data has been better than expected, and the outlook for staffing markets in major economies has shown some improvement, Deutsche asserts.
That being said, yesterday’s update from PageGroup and today’s from Hays underline how difficult the market is in the UK & Ireland at present, and consequently Deutsche prefers mainland Europe-based players Adecco and Randstad because of their lower exposure to the UK, at least in the short term.
Organic growth forecasts for Hays for the current financial year (to end-July) and next have been raised by Deutsche from +2% and -13% to +4% and +7%, respectively.
Deutsche’s earnings per share (EPS) forecast for the current year has been inched up 2.5% while next year’s has been bounced 51.5% higher, leaving the German bank 18% and 11% ahead, respectively, of the market consensus forecasts.
The price target for Hays has been raised to 160p from 120p.
The shares currently trade at 158.5p.
Organic growth forecasts for PageGroup for the current financial year and next have been raised from -6% and -15% to +6% and 0%, respectively.
The EPS forecasts move up by 49% for the current year and by 62% for next, putting Deutsche’s estimates 21% and 8% ahead, respectively, of consensus forecasts.
“Notwithstanding the company’s cautious tones on their conference call we are forecasting growth YonY in 17e at the EBITA [underlying earnings] level. UK gross profit declines would have to be much more material than we forecast to get current consensus,” Deutsche Bank claimed.
The price target for PageGroup’s shares has been hiked to 400p from 300p. The recruiter’s shares currently trade at 430p.
Barclays Capital has also lifted its price target for PageGroup, from 390p to 410p, while sticking with its ‘equal weight’ rating.
“Accelerating growth and estimates that were aggressively rebased following the UK's vote to leave the EU have left market forecasts too low and we upgrade our 2017 EPS by 11%,” Barclays said.
The investment bank expects PageGroup’s trading at the start of 2017 to be stable and if the recruiter can keep that up for the rest of the year, further upgrades should follow.
“However, we are wary of assuming the backdrop stays so supportive; geopolitical risk is elevated in several of PageGroup's key markets and this has the potential to dampen growth as the year progresses,” Barclays said.