I. Sector landscape and outlook
 

After years of sustained demand for the workforce and salary growth across the industries in the UK, the severe impact of novel coronavirus started dragging the UK job market since mid-March 2020. Permanent staff placement witnessed a steep fall in the last two months (March and April) across the UK, as per the recent survey by a consultancy firm Prism Executive Recruitment. This is the highest decline in the last 22 years since the series began. The primary reason which drove the fall is the strict lockdown measures as part of efforts to contain the spread of the COVID-19 virus. Further, Temporary businesses closures, social distancing and uncertainty around the outlook led to widespread recruitment freezes and delayed in hiring decisions.

Fig 1: Permanent Placement Index/ Temporary Billing Index.

Source: Prism Executive Recruitment

UK Unemployment remains unchanged in the three months to April
 
According to the latest data released by ONS, UK unemployment rate remained unchanged at 3.9% (three months to April). However, employees on company payrolls fell 612,000 between March and May owing to a temporary closure of businesses following the countrywide lockdown implemented by the government. Though an unchanged data came as a surprise, job vacancies declined to the lowest during the period since 2001. There were an estimated 476,000 vacancies in the UK during the period, 342,000 fewer than in the previous quarter. The COVID-19 fog is still hovering, which is likely to put pressure on the job market in the near term, and if the second wave arises, it will provide a major setback to the employment scenario. However, a respite to the falling vacancies is expected in the near term as the government decided to open the economy in a phased manner. This move is likely to start the economic and industrial activities, thereby increasing the demand for workforce.

Short-term Employment Outlook in the UK

The recent survey of the UK Labour market by CIPD, UK, shows that employment intentions have declined significantly over the past three months to May 2020. Almost half of the respondents said that they would maintain the current staff levels until July 2020. While almost 20% of the respondent said that they would increase the staff levels, and almost 22% said their intention is to decrease the staff levels. 
 

Fig 2: Decomposition of net employment balance over time.

Source: CIPD, UK
 
The sentiment is negative in the private sector compared to the public sector. Around 25% of the private sector employers said that they have the intention to decrease the staff while more than 25% of public sector organization said that they have the intention to increase the staff level. The positive sentiment is the public sector is driven by the healthcare segment.

Improving Regional Trends in the UK

After months of muted growth in the UK labour market, employers in north-east of England, the north-west of England, Scotland and Wales are expected to see an increase in staffing levels in the next few months. The intention to hire people increased in Wales by 7%, Scotland 6%, the north-west of England 6% and in the north-east of England by 6% according to the CIPD survey. In contrast, the workforce is likely to shrink in other regions as the intention to hire people decline in the West Midlands by 17% and in London by 8%.

Hiring trends in key industries

In a bid to cut costs, many businesses have imposed pay cuts and hiring freezes amid COVID-19 pandemic. However, some industry players are using this as an opportunity to employ skill-rich talent across verticals. The outbreak of the global coronavirus pandemic has changed industry dynamics in a jiffy. Even though the spread of coronavirus has impacted several industries such as travel, restaurants, and cab services, it has proven to be a boon for e-commerce companies

Technology:  Many technology firms have continued to hire during the COVID-19 pandemic as demand for remote system rises in the wake of government-mandated lockdown. Software engineers, IT auditors, cybersecurity experts and data & analytics professionals are in demand.

E-commerce: E-commerce space is also driving the employment amid the current challenging time as companies in this space are witnessing a robust demand as more and more people are purchasing online.

Healthcare: Healthcare industry is at the forefront of fighting against coronavirus. The sector continues to provide new opportunities in research, pharmaceuticals and other support services.
 
Outlook

Despite a tumultuous jobs market across the globe, especially in conventional businesses, we believe that many new-age enterprises are going to take the lead in terms of recruitment. Sectors like e-commerce, life-science, pharmaceuticals, diagnostics, Agri-tech, IT services, EdTech, Fintech, Logistics & shipment, Capital Market and Research & Analytics are expected to start hiring in bulk, given the demand for their offering have been significantly higher, and the trend is expected to remain same. Also, amid times when travel, hospitality, entertainment sectors are laying-off, the industries like construction, manufacturing, e-commerce are desperate for workers as lockdown restrictions are cooling down after two and half months in many geographies. And, to ramp up the activities, they have to bring back the workforce. Construction and Manufacturing activities are also gradually restarting in the UK and across the world. As these sectors are among the large employer, staffing activities are set to improve slowly in these sectors.  Hence, we believe the worst for the jobs market is behind, and things will improve gradually in the next 2-3 quarters and need of recruitment firms would also surge.

Financials

UK employment services providers have a proven track record of generating decent Return on Equity and positive Free Cash Flow. The firms in the industry are relatively lower debt-ridden, given the asset-light nature of the business. The average free cash flow yield of the sector stood at 12%, which is gigantically higher as compared with the other industries; this provides a safety cushion to the players operating within the arena. We believe that higher free cash flow generation capacity of the industry-backed by lower debt contribution placed the industry players to efficiently navigate through the challenging time. Also, the market seems to have discounted the next few quarters of weak earnings and lower revenue as the employment service providers listed on the LSE declined ~33% YTD. However, in last one month, the sector recorded an average return of ~11%. Moreover, the average return on equity of the employment services providers stood at 26%, which is substantially higher. So, given the higher ROE generation of the industry, together with higher free cash flow yield and lower debt contribution, we believe that industry would be back to the limelight in the near term.

Key Risks

The second wave of COVID-19 could have a severe impact on the already jolted jobs market. This would further compel the government to put restrictions on travel, non-essential businesses activities which in turn would weigh on the job market. The employment services providers are closely synched to the level of employment and job openings within the geographies they operate; hence, any such scenario would impact them adversely.

II. Investment theme and stock under discussion (HAS, STEM, MIND and PAGE)

After understanding the recent trends in the industry, let’s now look at the four players from the industry those are listed on the London Stock Exchange. To assess the same, companies’ stocks are evaluated based on EV/Sales.

1. LSE: HAS (HAYS PLC)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: GBP 2.04 Billion)

Hays Plc is a United Kingdom-headquartered recruitment company with an outstanding market capitalisation of £1.96 billion.


 
 

 
Valuation

The group’s shares were trading above the short-term crucial support levels of 5-day, 10-day, 20-day, 30-day, 50-day, and 60-day simple moving average, which is a positive price trend in the stock. Further, our illustrative valuation model suggests that the stock has a potential upside of ~16% over the current price of GBX 126 at 1:30 PM GMT on 16 June 2020.


 
 
2. LSE: STEM (SThree PLC)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: GBP 351.4 Million)

Sthree Plc is a London-based international staffing company. The company is a pure-play recruitment firm focused on science, technology, engineering, and mathematics (STEM) industries.


 

 
Valuation

The company has bagged approximately 33% in a month-over period and outperformed the benchmark index by 26% at the same time. Also, at the current trading price, shares of STEM were trading above the crucial short-term support level of 30-day and 60-day SMAs, a positive trend. Further, our illustrative valuation model suggests that the stock has a potential upside of ~ 17% over the current price of GBX 272.0 at 1:30 PM GMT on 16 June 2020.


 
 
 3. LSE: MIND (MIND GYM PLC)

(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: GBP 99.5 Million)

Alternative Investment Market- listed Mind Gym PLC is an employment services provider of professional leadership skills and business relationship management services. 
 
   
 
 
 
Valuation

The company has solid fundamentals with strong cash balance and cash conversion ratio. Also, a diversified blue-chip client base and increased repeat revenues (88%) provides stable revenue visibility. Further, our illustrative valuation model suggests that the stock has a potential upside of ~17% over the current price of GBX 100.0 at 1:30 PM GMT on 16 June 2020.


 
 
4. LSE: PAGE (PAGEGROUP PLC)

(Recommendation: Hold, Potential Upside: Low Single Digit, Mcap: GBP 1.28 Billion)
 

United Kingdom-headquartered Pagegroup Plc is engaged in the recruitment consultancy and other ancillary services.


 
 


Valuation

PAGE shares are trading above the short-term crucial support levels of 5-day, 10-day, 20-day, 30-day, 50-day, and 60-day simple moving average, which is a positive price trend in the stock. Further, our illustrative valuation model suggests that the stock has a potential upside of ~3% over the current price of GBX 402.40 at 1:30 PM GMT on 16 June 2020.


 
 
Note: All the recommendations and the calculations are based on the current price at 1:30 PM GMT on 16 June 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

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