A recruitment firm to bet on as the world gets back to work
Recruitment consultant Hays has been volatile, but results are strong and trends encouraging. Matthew Partridge explains the best way to play the share price.
The world of work has been turned upside down over the past few years. From millions of people being put on furlough, through the shift to homeworking and to the “great resignation”, the job market has been in constant turmoil. So it’s not surprising that the share price of recruitment firm Hays (LSE: HAYS) has been see-sawing over the past two-and-a-half year.
At the start of 2020, its shares were trading at 165p. They then plunged below 100p by late spring, before bouncing back to 120p. They then fell again to 102p in November 2020, before news of a vaccine pushed them back up to pre-pandemic levels by summer 2021. However, in the past year they have fallen to 115p.
There are obvious reasons for investors to be cautious. Rising energy prices and higher interest rates threaten to push the UK economy into recession, while labour participation levels are still lower than they were before the pandemic.
Still, Hays should benefit from some major tailwinds that are benefiting the recruitment industry. Chief among these is a shortage of labour, which should push up the wages that people receive and means that the services of recruitment agencies are in demand. The large number of people quitting their jobs, or rethinking their career paths, is also creating churn, which means that more people have to be hired to replace them, even if the net number of jobs stays the same.
These favourable trends have put Hays’ revenue on track to surpass pre-pandemic levels this year, and the numbers are expected to keep growing strongly next year. Hays is also pursuing several strategies to boost long-term growth.
This involves making a big move to win business from small and medium-sized companies, as well as boosting its income from technology recruitment, which is now 42% above its pre-pandemic levels. It has also identified engineering and life sciences as well as emerging markets (at the moment around half its net fee income comes from the UK and Germany) as other potential growth areas that will allow it to grow faster than the recruitment industry as a whole.
Overall, Hays has a strong record of growth, with revenue increasing at a solid rate of roughly 6% a year in the five years between 2016 and 2021. It has also managed to deploy capital efficiently, earning a return on capital employed of about 10%. Despite this, it trades at only 12 times its 2023 earnings and currently has a dividend yield of 5.3%, much higher than the comparable figure for the FTSE All-Share, which is only 3%.
Still, while Hays has great potential, the fact that its share price has fallen by 5% in the past three months, and by 17% since the start of the year, means I would suggest waiting for evidence that the trend has turned the corner. As a result, I’d suggest that you hold off until the price reaches 125p before going long at £20 per 1p. In that case, I’d have a stop loss of 75p, which would give you a total potential downside of £1,000.