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PageGroup shares drift lower after downgrades by Kepler and Numis

“We expect to see a gradual slowdown in top-line growth,” Kepler said as it cut its rating on PageGroup to 'hold' from 'buy'.
The shares now trade at about a 10% premium to peers, says Kepler

PageGroup PLC (LON:PAGE) shares edged lower on Thursday after the specialist recruitment firm was downgraded by analysts at Kepler Cheuvreux and Numis.

Kepler cut its rating to ‘hold’ from ‘buy’, saying the shares now trade at about a 10% premium to peers after rising 26% in the year to date.

“We expect to see a gradual slowdown in top-line growth,” the broker added.

“Furthermore, valuation is no longer undemanding.”

On Wednesday, the company said it now expects operating profit in 2018 to be “slightly ahead” of the consensus market forecast of £134mln after delivering record quarterly gross profit.

READ: PageGroup raises 2018 guidance after record quarterly gross profit

Total gross profit in the second quarter rose 14.5% to £208.2mln from £181.8mln the same period a year ago as growth across international job markets mitigated a poor performance in the UK.

Falling unemployment rates and improving confidence provide support 

On a reported basis, gross profit in permanent recruitment was up 15.7% and temporary recruitment grew 10.5% in the quarter. This resulted in a ratio of permanent to temporary recruitment ratio of 78:22, compared to 77:23 last year.

“Driven by declining unemployment rates and rising candidate confidence we expect this trend to continue,” Kepler said.

“We expect the ratio to increase from 75:25 in 2017 to 77:23 in 2020. This will be positive for the group gross margin (2017: 51.9%, 2020 estimate: 52.4%).”

Kepler raised its target price to 600p from 650p as it lifted its estimates for earnings (EBIT) in 2018 to 2020 by 4% to 5%.  Based on the new target price, the stock would trade at a 13% premium to its peers.

“Although we still see the risk to our estimates is somewhat to the upside, we also believe with a developing trade war and an expected slowdown in fee income growth this upside is limited,” Kepler said.

Numis lowers rating but remains positive 

Numis revised its rating to ‘add’ from ‘buy’ and increased its target price to 650p from 600p. It also raised its forecast for 2018 earnings (EBITA) by 6% to £139mln and its estimate for 2019 EBITA by 3% to £157mln.

"Strong broad-based trading trends, and a confident outlook underpin another positive update from PageGroup," Numis said.

"The shares trade at a discount to their historic five-year average, and scope for further earnings upgrades and cash returns support the investment case."

PageGroup ended the second quarter with net cash of £85mln. Numis said this suggests a special dividend of £35mln of 11p per share, and an incremental yield of 2%.

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