Business Overview
SThree PLC (STHR) is a London, the United Kingdom-based international staffing company. The company offers expert recruitment services in the STEM (science, technology, engineering and mathematics) industries. The group offers contract and permanent staff to diversified sectors, including banking and finance, energy, life sciences, engineering, and ICT (information and communication technology). The company’s staffing business is differentiated in four segments: Continental Europe, Asia Pacific & Middle East (APAC & ME), the United Kingdom & Ireland (UK&I), and the USA. The group also offers resources to support its products with contractor services.

Key Brands: Computer Futures, Progressive Recruitment, Huxley, Real, Orgtel, JP Gray, Newington International, Madison Black, Global Enterprise Partners, and Hyden.

Half Year Trading Update (as on 14^th June 2019)

(Source: Trading Update, Company Filling, LSE)

The company’s net fees surged by 9 per cent to £163 million as compared to £148.4 million in H1 FY18. The continental Europe net fees rose by 13 per cent to £93.9 million against the £83.9 million in H1 FY18, due to an increase of 15 per cent and 11 per cent in DACH and the Netherlands. The USA segment net fees climbed by 13 per cent to £35.5 million as compared to £29.5 million in H1 FY18. The company have delivered growth in all the regions except UK&I. The UK&I was down by 9 per cent to £23.8 million against the corresponding period of the previous year. All the sectors in which the group deals recorded growth except for banking & finance.

The company’s contract continued to deliver a solid performance with net fees increased by 12 per cent to £121.1 million. All regions except UK&I delivered double-digit growth with the USA increased by 22 per cent, Continental Europe was up by 16 per cent, and APAC & MENA surged by 15 per cent.

Permanent net fees decreased by 1 per cent to £41.9 million against the £41.7 million in H1 FY18. Net fees in the USA decreased by 10 per cent, driven by the previously reported strategic and leadership changes made in H1 FY18. The company delivered solid growth of 9 per cent in DACH, the largest permanent region, and in Japan, growth surged significantly by 49 per cent year-on-year.

On 31^st May 2019, net debt was £8 million, an increase of £1.8 million as compared with the corresponding period of the last year. The group has a £50 million RCF (revolving credit facility) with HSBC and Citibank, which is committed to 2023.

Share Price Performance

Daily Chart as at June-14-19, before the market closed (Source: Thomson Reuters)
 
At the time of writing (as on June 14, 2019, at 10:37 AM GMT), shares of STHR were quoting at GBX 284.28/share and added 2.81 per cent against the yesterday's closing price level. The company’s stock beta stood at 0.57, reflecting lower volatility of the stock as compared to the benchmark index. In the last 52-wks, shares of STHR have registered a high of GBX 393.50 and a low of GBX 245.00.

Valuation Methodology


Conclusion
The company has delivered decent growth in the H1 FY19 period. In the regional and sector classification, the key performance indicators performed significantly. The group had also reported a decent growth in the net fees across all the three geographic segment except the UK&I and have plans in place to drive growth over all of them.

The scale of the STEM prospect is both growing across the key regions and sectors. The company continue to invest in high performing teams to drive the growth. The company has decent performance in all the key areas and industries in their diversified portfolio. The company has a good start of the financial year 2019 and prospect for the full year remains the same.

Based on the strong growth prospects of the company and the valuation done using the above method, we have given a “Speculative BUY” recommendation at the closing price of GBX 276.50 (as on 13th June 2019) with single-digit upside potential based on 12.33x NTM Price to Cash Flow (approx.) on FY19E cash flow per share (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.
*The “Speculative Buy” recommendation is valid for the current price as covered in the report (as on 14th June 2019).

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