Matchtech is the UK's number 1 specialist engineering (60% group NFI) and number 3 technology (split 23% IT & 17% Telecoms) recruitment agency, providing contract, temporary and permanent staff. After the £66.8m acquisition of Networkers International a year ago, the group now derives 30% of NFI overseas (albeit mostly still invoiced from UK), and has also become Britain's 5th largest technology agency.
The UK recruitment sector looks oversold. The recent 'air-pocket' slowdown in demand has led to a sharp contraction in valuations, with sector EV/EBITA multiples tumbling 25% on average over the past 6 months from 12.9x to 9.7x. However, with interest rates anchored at 0.5%, real wages rising and unemployment low, then from a macro standpoint - even ahead of the BREXIT vote on 23 June - the UK labour market certainly does not appear to be falling off a cliff.
Matchtech's results today did show that LFL NFI declined -1% to £35.85m for the 6 months to January 2016, but we think that there are numerous reasons why their results are set to pick up in H2'16 and beyond. In fact, this anticipated improvement is already starting to peek through in the numbers, since on a weekly run-rate basis, underlying LFL NFI actually rose 4% in H1'16 versus H2'15.
Encouragingly, the largest division, Engineering (60% of group), continues to power ahead. Organic NFI climbed 7% to £21.6m in the 1st half, driven by excellent demand from rail, water and commercial property (Infrastructure +19%), coupled with multi-year visibility with regards to projects such as the Thames Tideway Project, Crossrail (phase 2) and the Wessex to Waterloo line upgrades.
We see Matchtech shares at an inflexion point, apparently missed by the broader financial community. Indeed, we predict LFL NFI will rise 4.9% in H2'16, and climb 3.6% for the full year. As a result the expected NFI growth, combined with the group's operational leverage, are forecast to lift H2'16 and FY16 EBITA to £12.4m and £22.5m respectively - with adjusted diluted EPS coming in at 46.5p (+4.1%).
On valuation, at 470p we think the stock represents good value, trading on miserly FY16 EV/EBITA and PER multiples of 8.0x and 10.3x, on top of paying a sector leading 5.1% dividend yield (1.9x covered). Consequently, based on the lower closing net debt balance and a modest 9.5x FY17 EV/EBITA rating, we have raised our price target from 604p to 621p/share.
