Stockwatch: This share is just the job

Why the valuation disparity? Shares in AIM-listed international staffing group Empresaria have rebounded to just over 80p with strong interim results prompting upgrades, hence the forward price/earnings (PE) multiple a mere 9 times, reducing to 8 times. It compares with over 20 times for other international recruiters such as Robert Walters and Michael Page International - riskier valuations if the global economy is near a cyclical peak, just as the US central bank looks to tighten monetary policy.

Broad economic performance is the chief issue affecting prospects and sentiment towards recruiters - whether the US can continue robust and Europe benefits from QE, or China drags everyone down. So if current stockmarket jitters are overdone then Empresaria in particular is a good tuck-away, set for continued strong trading and re-rating.

Chart reflects macro context

While Empresaria appointed a new chief executive four years ago - a move that can galvanise improvements - its five-year stock chart significantly reflects macro shifts. The price plunged from 69p to 17.5p in the second half of 2011 amid turmoil over US/Eurozone debt, then embarked on a volatile recovery as QE prompted a move into riskier cyclical stocks and the real economy benefited in due course.

Fresh highs over 70p were explored this year, and above 80p recently, as recovery in the UK (34% of 2014 profit) continued and continental Europe (47% of profit) benefited from positive conditions in Germany and despite difficulties in Finland. Empresaria also has significant exposure to Asia which constitutes most of "rest of world" (19% of profit).

Management suggests the economic situation in South East Asia could lead to a slowdown in that area, although Japan, the United Arab Emirates and India look to have continued growth prospects. UK revenue has slipped 5%, mainly due to the end of the London Heathrow Terminal 2 project, plus a planned reduction in low-margin temporary work. Otherwise, there is growth across the financial, technical & industrial, and domestic sectors.

Progress driven by a shift to permanent recruitment

Empresaria says full-year results will be ahead of (recent) market expectations, deriving significantly from a change in revenue split. Half-year permanent revenue grew by 29% (or 28% in constant currency), while temporary fell by 5% (flat in constant currency) - thereby a 2% overall revenue fall (or 3% gain in constant currency).

Higher-margin permanent recruitment typifies the mid- to-later stage of an economic cycle, as firms become more committed to hiring. This explains a 5.7% fall in cost of sales to £68.3 million, the chief reason why pre-tax profit jumped 33% to £2.7 million. Anyway, the true measure of an agency type business is often regarded as net fee income (gross profit) which rose 12% to £24.1 million, or by 16% in constant currency. While easier for smaller firms to achieve percentage gains, the trend bodes well for the second half - where Empresaria's performance tends to be weighted.

Analysts only seem to be upgrading 2015 profit forecasts by about £0.2 million to £7.4 million whereas momentum suggests over £8 million is possible, with EPS over 10p, i.e. a modest PE around 8 times. Management is also optimistic for the medium term: "Despite increasing currency headwinds, market conditions are generally favourable and we see further opportunities to grow our business over the coming years."

That's encouraging, although rivals such as Robert Walters tend to be wary about visibility in this industry. If the global economy does weaken then recruitment is liable to go on hold for many firms. Such a risk is effectively priced into Empresaria on its current rating; which is not to say the stock can't drop again, but it is less exposed than Page or Walters.

Beware the maturing business cycle

Sceptics would say that recruiters' current strong performance aided by a shift to permanent jobs is precisely what you would expect to see as a business cycle matures. Mind any tiredness, e.g. the August UK services growth figure was the slowest in more than two years, mirroring signs of weakness in the US and China, with overall UK growth now predicted to slow slightly. The August drop in retail sales was also the biggest in seven years, which apologists say was caused by a spending switch to eating out and holidays amid sterling's strength. That can be seen in easyJet's recent out-performance and bodes well for pub groups such as Youngs I have advocated. So the weaker figures may appear straws in the wind but we need further proof.

While the US and UK look poised for very modest monetary tightening, sometime in the next six months, the European Central Bank (ECB) has hinted at more QE and lower energy prices may also provide a stimulus - so it's possible there are exceptional factors adding to the length of this cycle. Obviously, one needs also to avoid the trap: "It's different this time." The global economy remains a huge and imprecise call, but is what international recruitment stocks represent a call on.

Debt looks manageable

A classic late-cycle operational risk is that managers over-gear the business. However, Empresaria shows a 30% reduction in net debt (mainly non-current bank loans) to £9.9 million with the income statement showing net finance costs taking barely 7% of operating profit. Nothing too risky, although Michael Page and Robert Walters are ungeared and do not have the same extent of goodwill/intangibles within net assets - 89% for Empresaria.

Current assets versus current liabilities are also rather tight, at 1.15 times. So the balance sheet is not that great. Earnings cover for the dividend is also 13 times and has been higher, with the yield sub-1%. More positively, bank facilities have been tidied up to be local where the businesses have significant temporary revenues - e.g. a UK revolving credit facility had been used to fund German working capital - which also simplifies covenants.

So there are macro and micro reasons why Empresaria's PE is lower than Page or Walters, but it's still a glaring contrast. Unless the global economy lurches down, risk remains on the upside.

For more information see: empresaria.com.