Let's make no bones about it, the UK recruitment sector has been hit by a 'perfect storm' over the past 6 months. Brexit, a snap General Election, delays to major infrastructure projects (eg HS2), falling car sales, a manufacturing recession and lower aerospace orders, reflecting the temporary halt in production of the Boeing 737 MAX.
In fact, we heard as much on Monday, when STEM rival SThree warned that UK NFI had fallen -11% in the quarter ending Nov 19. Similarly today, Gattaca reported that its UK NFI had declined -11% for the 5 months to Dec 19, and now anticipates FY20 adjusted PBT to come in at c. £6m vs consensus of £10m.
Clearly this is disappointing, however it's not all bad news. Firstly, the lower activity levels mean there is likely to be a working capital unwind this year, which we reckon will reduce FY20 net debt to £25m (or 2.7x EBITDA) vs £30m before. Next, additional cost & cash savings are being considered that would also hold the group in good stead, once this mini Cat-1 squall has blown itself out.
Lastly, we think conditions should improve next year, with FY21 PBT forecast to climb to £10m, closing with net debt of £19.4m (1.5x EBITDA). Sure our valuation drops from 160p to 135p/share, yet equally we believe there is still considerable upside, with the stock (at 105p) trading on a PER of 7.7x vs 10.4x for peers.
