- Net fees shrink year on year
- The Netherlands bucks the negative trend
SThree (STEM) specialises in filling temporary roles in the technology, science and engineering sectors. When there is economic uncertainty, companies would rather turn to temporary employees, but ultimately like all recruiters, SThree is a cyclical business. When companies are confident and growing, they process more hires.
The problem for SThree is that there is uncertainty in the market. In its half-year trading update, its reported year-on-year net fees were down 7 per cent due to the “ongoing challenging backdrop”. SThree makes 48 per cent of its revenue from the technology sector, which has pulled back on hiring since rising interest rates increased focus on cash flows and slowed job creation.
Out of all the regions, the US saw the biggest drop, with net fees falling 13 per cent, followed by Germany at 12 per cent and the UK also at 12 per cent. On the other hand, the Netherlands saw revenue increase 3 per cent because of a strong contribution from engineering. Renewables remains the fastest-growing sector, up 15 per cent year on year.
Compared with its own history and its rivals, SThree is looking cheap. It is trading on a forward price/earnings (PE) ratio of just 10, according to broker consensus compiled by FactSet, well below peers PageGroup (PAGE) and Hays (HAS), which are both trading on forward PE ratios of 18.
The hiring slump isn’t going to last forever. Businesses need stability to feel confident to increase hiring, but there is already evidence that inflation rates are returning towards 2 per cent and once this wave of elections is complete, that confidence will slowly return.
It is likely that SThree is near the bottom of the cycle and at this price continues to offer good value, although external issues beyond management's control will exert influence as the politically charged year pans out.
Last IC View: Buy, 387p, 30 Jan 2024
