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. 74% of NFI comes from placing contractors (9,000 on assignment), with the remaining 26% from permanents.
Several economists think there will be a recession post BREXIT, albeit we suspect there will be only a temporary dip in GDP, with normal activity levels returning once the initial shock has passed. Regarding Matchtech we would argue that the business is far less cyclical than the broader staffing sector, since most of its infrastructure, automotive, telecoms, IT/software and aerospace customers are enjoying secular growth drivers, with exporters receiving a further boost from Sterling's 10% devaluation.
Even if we are wrong and there is a prolonged decline in output, then this is still likely to affect permanent placements far more than MTEC's approx. 9,000 strong contractor base - many of whom are working on long term government-funded capital projects (eg Crossrail) and/or infrastructure programmes within regulated industries (eg water, rail, etc).
This downside resilience was again demonstrated this morning, following news that adjusted PBTA for the year ending July 2016 would be in line with management expectations, with LFL FY16 NFI up 1% to £72.6m - thanks to a solid second half (+3% vs -1% in H1'16) on the back of continued strong demand for skilled engineers (H1: 7%, H2: 5%) even after the EU Referendum.
Overall this was a very creditable performance, especially given the headwinds experienced elsewhere in the industry. Nonetheless, we have shaved our FY16 adjusted PBTA and diluted EPS numbers (excluding discontinued activities) by 4% to £20.4m (vs £21.3m) and 43.7p (vs 45.6p) respectively. 0ur adjusted FY17 PBTA forecast has been trimmed too - this time by 14% to £19.7m (vs £22.9m) reflecting relatively flat underlying NFI growth of 0.6% to £73.0m vs 1% LFL in FY16. Accordingly, our share price target falls from 621p to 460p per share.
On valuation the stock at 345p appears cheap, trading on forward EV/EBITA and PE multiples of 6.8x and 8.2x respectively vs 8.4x and 12.0x for the peer group average, as well as offering a 6.7% dividend yield (1.8x cover), supported by healthy cash generation, attractive NFI conversion rates and a robust balance sheet.
