Recruit undervalued and high quality staffing firms to your portfolio
With unemployment in the UK and across many countries at historic lows and a shrinking working-age population, employers are increasingly having to turn to recruitment experts to solve their staffing needs.
The global employment market is worth in the region of £450bn a year and is expected to grow at about one-and-a-half times the rate of global GDP up to 2020.
The biggest three players to watch globally are Swiss firm Adecco, US firm Manpower and Dutch firm Randstad, although none of which are listed on the London Stock Exchange. [see Table A].
The biggest recruitment markets are the US, which accounts for around 40% of industry revenues, Japan (15%), China (11%), Germany (10%), the UK (10%) and France (7%).
Of the five biggest London-listed recruitment firms by turnover and market capitalisation, Hays (HAS) is the largest and is active in all the big markets.
The rest of the top five firms all have a similar level of turnover (£1bn-£1.5bn) and also provide their services globally [see Table B].
Due to the tightness of the labour market, candidates have more choice not just of where they work but also how they work.
NO MORE 9 TO 5
The traditional 9-to-5 job has been in decline for some time and the concept of a job for life is well and truly dead.
Instead employees are open to having more varied careers, working when, where and how they want based on their skills, interests and compensation needs at different points in their lives.
Meanwhile big employers are having to compete for staff with smaller companies and start-ups which often pitch themselves as offering a better work/life balance.
As well as finding staff for employers, some recruitment firms offer the ability to take on the whole human resources function. This ‘outsourced’ market is growing fast as more employers look to reduce their central overheads.
TEMPORARY WORKING ON THE RISE
Much has been made of the emergence of the ‘gig’ economy, where workers take on short-term tasks or jobs, but in reality this is a very small proportion of the jobs market.
However it does highlight how flexible the market has become and one trend that both employers and recruiters expect to grow is the tendency towards part-time working.
Temporary employment is surprisingly low at around 2% of total employment in the US and Europe. The UK and Australia are the stand-out markets but even here the penetration rate is only around 4%.
SKILLS SHORTAGE HITS COMPANIES AND THE ECONOMY
Companies aren’t just struggling to find employees, they’re also struggling to find suitably qualified employees. In many cases this means people with good IT skills.
The growing mismatch between the skills offered by job-seekers and those needed by employers means that the rate of unfilled vacancies is rising across the world.
According to Adecco, there are currently over 260,000 IT vacancies in the US. That represents a big drag on the economy and given an average salary of $75,000 it means almost $20bn of earnings going begging.
The problem hasn’t been solved by more people going to college either. While 90% of recent graduates in the US believe they are well prepared for a job, only half of hiring managers share that view.
TAPPING INTO GLOBAL DEMAND
Even with geopolitical fears rising and continued rumblings about a trade war causing a global growth slowdown, the world economy and employment continue to grow.
A key measure of sales is net fee income. This is how much they make for placing people after deducting their own costs. Some firms refer to it as gross profit.
The three biggest London-listed firms, Hays, PageGroup and Robert Walters, have been growing their net fee income by an average of 15% over the last year, well ahead of the growth rates seen at most FTSE companies.
Expansion has come mainly from outside the UK with the US, Japan, France and Germany contributing strongly. Hays and PageGroup also flagged China where net fee growth was roughly 30% last quarter.
Despite the UK recording 4% unemployment, the lowest rate for 40 years, the market has proved tough for recruiters with net fee income barely growing in the last quarter.
Due to the competition for jobs, salaries are starting to rise especially in IT and other hard-to-fill vacancies. The latest pay data from the ONS shows average pay packets grew by 3.1% in the three months to August, the highest rate since 2009.
Despite this, and the claim by the Bank of England’s chief economist Andy Haldane that the UK is seeing a ‘new dawn’ of pay growth, the recruiters themselves say there is no evidence of widespread pay inflation.
GOOD COMPANIES ON CHEAP VALUATIONS
Recruitment firms can be great businesses with returns on capital for the big three UK firms averaging about 40%. In other words for every £100 of capital they invest in their businesses they generate an operating profit of £40.
By comparison the average return on capital for FTSE 100 companies is 10% (£10 for every £100 invested).
Also, thanks to the market sell-off of the last few weeks, these stocks – which already looked cheap for the returns they generate – now look like bargains. We are buyers of the following three stocks:
Hays has a return on capital of 35%, an earnings yield of 11% and a dividend yield of 4.6%. Its shares are down 15% this year.
PageGroup (PAGE) has a higher return on capital (43%), an earnings yield of 7.5% and a dividend yield of 4.2%. The shares are up 10% this year.
Robert Walters (RWA) has a return on capital of 35%, an earnings yield of 9.3% and a dividend yield of 2.2%. Its shares are up 7% this year. (IC)
HOW TO INVEST IN THE SECTOR VIA FUNDS, INVESTMENT TRUSTS AND ETFS
At the moment we cannot see an exchange-traded fund (ETF) which tracks a basket of recruitment stocks, nor a specific fund or investment trust dedicated to this space.
As such, investors wanting to go down the funds route will have to buy a more general product which includes recruiters alongside other industry sectors in its portfolio.
Although this will provide exposure to certain recruitment stocks, you have to consider these may only have a small influence on the overall performance of the fund.
Here are some examples of funds and investment trusts which contain the three biggest London-listed recruitment companies:
HAYS is a holding of:
Mercantile Investment Trust
Jupiter UK Growth Fund
Threadneedle UK Equity Income
ROBERT WALTERS is a holding of:
Aberforth Smaller Companies Trust
Marlborough Special Situations
Old Mutual UK Select Smaller Companies Fund
PAGEGROUP is a holding of:
Liontrust Special Situations Fund
Man GLG UK Income Fund
Merian UK Mid Cap Fund