The company, which dates back to Alexander Hays’s warehouse operations business in 1651, merged with Ronnie Frost’s Farmhouse Securities in 1981, and Frost bought it outright in 1987. The company went public in 1989. Since then it has sold its commercial and distribution divisions to focus on its personnel arm. It is in the process of demerging its DX mail and courier operation.
Hays employs 4,700 workers and is run by Denis Waxman, the chief executive, though Frost still owns a 5% stake.
The two experts below have been selected for their skill in several investment areas. They, or the funds they manage, may buy or sell shares in the companies or sectors discussed.
Tim Steer, fund manager at New Star I saw the enthusiastic Denis Waxman, chief executive of Hays, for lunch last week. He kept on saying he was very glad he had got rid of the trucks.
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Well, Denis, soon the mail business will be going too. The mail activities, DX Services, are to be demerged later in the year. This raises an interesting point. If conglomerates attract a poor rating, then activities that are demerged usually attract a better rating. Just take a look at the value created by the demerger of Burberry from GUS.
On a demerger, DX Services could be worth £190m. At the current price of around 131½p, Hays, including DX Services, is worth £2.3 billion. It is estimated that Hays Specialist Recruitment will make £121m of profit in 2005. That puts its activities on a price-earnings (p/e) ratio of 16.5. Contrast this with the rating of its main rival recruitment company, Michael Page, which trades on 22.5 over the same period.
Hays trades at a discount to Michael Page of 25%. Admittedly, Michael Page has a higher proportion of permanent recruitment income and a large part of this falls through to the bottom line as activity increases, but just imagine what could happen to Hays’s p/e ratio if it expanded its permanent recruitment activities. I believe it will do so in the year ahead.
Waxman is convinced his recruitment market is due for another good year. There are skills shortages in accountancy and IT and these markets picked up in the last quarter of the year.
Earnings were being diluted as large users of contract IT staff were able to exact cheap deals. But this has lessened recently as a more robust spot market for IT staff has started to return. This is good for profit margins.
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Between 1996 and 2001, Hays managed a conversion rate (percentage of net fee income converted to operating profit) of about 40%. The rate is currently running at 33%.
I am a betting man and I will bet that Hays (unfettered by trucks and mail) might just get there again — one day soon.
Judgment: Buy.
How times change. The emphasis now is on focus, with companies encouraged to concentrate on their core activity.
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Corporate financiers, who charged the companies a fortune to make the acquisitions, are generating a whole new range of fees as so-called non-core activities are sold off, demerged or floated.
With the demerger of DX Services, Hays is now focused entirely on its market-leading Specialist Recruitment business. Hays operates in both the temporary and permanent employment markets in several countries and sectors. Temporary recruitment represents 59.5% of its income, but profit margins in this area fell because the company took on a greater proportion of high-volume, low-margin contract business. “Spot” deals have higher margins.
The company is seeing good growth in accountancy and banking. These are two areas where businesses would have cut back on training new recruits during the past few years. As a result, salaries are now being bid up as companies try to hire new staff.
Hays is also seeing recovery in technology recruitment, and the results for the year to June 2004 show that this division, along with the other, had an acceleration in growth during the second half of the year.
These comments have led brokers to upgrade their forecasts for the next two years as they start to see the group benefiting from hiring more consultants and opening more offices, together with a pick-up in economic activity.
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The shares are on a prospective price-earnings (p/e) ratio of 16.5 to June 2005, falling to 14.7 with a yield of just over 3%. At this level they trade on a lower multiple than their peers as they are perceived to have less operational gearing or recovery potential. The shares have had a good run recently.
Judgment: Buy at 120p
HAYS GROUP AT A GLANCE
Share price: 131¼p
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Market value: £2.2bn
Year end: June 30
Consensus forecast for 2004 pre-tax profit: £186.5m
Consensus forecast for final dividend: 3.86p
Barclays owns 11% of Hays, and Morgan Stanley holds 10%.
Scottish Widows, Legal & General and Ronnie Frost all own 5%