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Hobson: Why Recruiters Matter

THE WEEK: Morningstar columnist Rodney Hobson thinks the resilience of UK listed recruitment firms could be a good sign for the UK economy

Rodney Hobson 18 January, 2019 | 12:56AM

London commuters

There’s a trade war between the world’s two largest economies, one of which is slowing down sharply. There’s Brexit, coming – or not – in heaven knows what form just as the UK is showing sluggish growth and resurgent Europe is coming well off the boil, with even the powerhouse of Germany in danger of slipping into recession. Life must be hell for the recruitment companies, surely.

Take PageGroup (PAGE), for example. Profits in the UK are running only 2.1% higher according to this week’s trading update. When you consider that the UK has supposedly gone to the dogs, that doesn’t seem too bad. In any case, Page has expanded heavily overseas. Into France, for example, where the riots in Paris and elsewhere restricted profit growth to a mere 10%. Europe-wide the figure is 13.9%.

China and the surrounding region? Up 22%. The Americas? A 29.2% improvement. Doesn’t sound at all disastrous. Page hasn’t taken on so many new fee-generating staff in the latest quarter but it has still recruited a few.

Page’s update followed a similar one from Robert Walters (RWA), where a 2% revenue increase in the UK was eclipsed by a 13% surge overall, and Hays, which managed commendable growth of 3% in fees in UK and Ireland and 9% across all regions. Yet Walters’ share price slipped to stand more than 30% down from its August high and Page closed down 7% on the day of the update. Only Hays (HAS), in which I have a long-held stake, managed to climb a little on the day of its update but it has suffered a similar five-month slide, as has Page.

I took the opportunity to make a modest investment in Page at 440p. I think the downside is factored into the share prices of all three companies, while any settlement of the US-China trade war and/or some sort of Brexit deal will send the shares sharply higher.

I see the recruitment sector as a bellwether for the wider economy. The continued growing demand for permanent and temporary staff suggests that this year could be better for company profits, and therefore shares, than last year. There are many reasons to be cautious, and investors should face the fact that there are many reasons to believe we are in a bear market. However, I’m more inclined to the view that we could yet achieve what was beyond reach in 2018: a record 8,000 points on the FTSE 100 index.

Should ABF Be Split Up?

By contrast, Associated British Foods (ABF) shares shot up 6% on a trading update that, like the company itself, was a right ragbag.

Sugar continues to be a horror story, with sales plunging well below even last year’s dire figures, and although prices in the EU look set to be a little higher this year, I wouldn’t advise shareholders to hold out too much hope. This is a commodity still in serious oversupply.

The struggling food side has long been propped up by Primark, the budget clothing retailer. There were fears that Primark would bomb this time along with the rest of the retail trade but sales were actually 4% ahead and profit margins improved.

The shares were £28.50 a year ago. They are now around £23. It’s become fashionable to split up large groups on the dubious pretext that this will enhance shareholder value. But with the Weston family owning more than half the shares and supplying the chief executive that isn’t going to happen, although the argument at ABF is particularly compelling.

I can’t see any attraction in investing in a company stuck with its legacy and controlled by a single investor that shows no signs of addressing its weaknesses.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Associated British Foods PLC2,229.00 GBX-0.22
Hays PLC160.10 GBX0.63
PageGroup PLC431.80 GBX2.81
Robert Walters PLC490.00 GBX-0.81

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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