Darkening jobs outlook won’t hit recruitment firms equally

DARK clouds have been gathering on the employment horizon for some time and the outlook for the UK jobs market has been getting steadily gloomier. Last week, a survey conducted by the Recruitment and Employment Confederation (REC) and KPMG warned of a double-dip in the jobs market and said employment had flatlined.

This week, official data published on Wednesday morning is expected to show that more Britons were claiming jobless benefits in September. With £83bn of public sector spending poised for the chop in next week’s Comprehensive Spending Review, fears of another bout of rising unemployment are intensifying.

Howard Archer, chief UK & European economist at IHS Global Insight, says: “I doubt that the private sector will be able to fully compensate for this. Indeed, I suspect that firms will become increasingly cautious in their employment plans, reflecting slowing growth and their concerns that the intensified fiscal squeeze will hold back expansion over the long term.”

He adds: “Many firms are likely to try to meet any increase in business through making greater use of the workers they have already, and they will be reluctant to take on any more staff unless they are really convinced that sustained improvement in their business is probable.”

But despite these warnings of a renewed downturn, recruitment firms such as Hays and Michael Page remained cautiously optimistic in their trading updates last week, pointing to the slow but steady recovery in business conditions here in the UK as well as strong growth in Asia-Pacific in particular. Are these recruiters worth spread betting on in the current climate?

Ian Jermin, senior analyst at Merchant Securities, says that he remains cautious on the sector despite the strong third-quarter updates from the three big recruitment firms Robert Walters, Hays and Michael Page because of the uncertainty regarding the direction of the global economy.

In his fourth quarter review of the sector published today, Jermin cites the headwinds that UK-listed recruitment firms are facing. For some, such as Hays, the public sector cull will be felt acutely. It is estimated that around 25 per cent of group net fee income comes from the public sector.

Within the UK, approximately 40 per cent of net fee income is derived from the public sector, but RBS’s Kean Marden says that a third of this is front-line doctors, nurses and teachers, which should be more resilient than back-office roles. Marden and his team have a buy recommendation on the stock.

Equally challenging, says Jermin, is the lack of confidence among both candidates and employers: “Recruitment tends to thrive on confidence – when you get confidence, people are more willing to change jobs and that churn is good for staffing companies.” He also warns that year-on-year comparisons start to get a lot tougher from the second quarter of next year even if strong growth in Asia continues.

Jermin recommends selling Hays because he feels that it is too expensive a stock and its rate of growth is much lower than that of Michael Page and Robert Walters. In contrast, he has a buy rating on Robert Walters, which has a 2011 forecast enterprise value as a share of net income (Ebitda) of just eight times compared to 10.8 times for Hays and 11.5 times for Michael Page.

Spread betters would be well advised to monitor the sector carefully. Day trading opportunities abound around the spending review next week while longer-term a bullish position on Robert Walters could pay off.