Malaise starts to spread

12-Nov-2008

With the Q3 results season now coming to an end, it is clear that trading has been every bit as poor as expected. Michael Page flagged that conditions became progressively more challenging during the quarter as weakness in the banking sector spread. Hays’ net fee growth slumped from 16% in April-June to 4% in July-September. Turnover declines at Randstad deteriorated from down 1-2% in July and August to -6% in September and -8% in October. The malaise is clearly spreading and even countries with attractive deregulation stories, such as Germany, are starting to dip into negative territory.

Share price performance has been mixed over the past two weeks with the sector benefiting from a small market rally, driven by hopes of aggressive interest rate cuts and an Obama victory. Quality companies such as Hays, Michael Page and Healthcare Locums (run by Kate Bleasdale who was understandably delighted to collect her Entrepreneur of the Year Award at the AIM awards last month) top the leader board. Smaller companies, which can be very difficult to trade given their low liquidity, have tended to lag behind.

Although recent surveys suggest that directors’ purchases of shares in their own companies are now 17 times as large as disposals (a multi-year high), similar action from the management of staffing agencies has been relatively limited over the past few quarters. However, last week Robert Walters, chief executive of Robert Walters, purchased 100,000 shares at 90p. This is his first addition since April 2008 when he, the finance director and the chief operating officer acquired 229k, 43k and 141k shares respectively at an average price of 149.8p. Walters’ share dealing is well worth tracking, as he sold two-thirds of his entire shareholding close to the share price peak in March and April last year.

An interesting snippet cropped up during lunch with the finance director of a leading staffing agency last week. During a recession, we all expect rates and volumes to come under pressure but it appears that all elements of the contract are now fair game. The finance director seemed a little exasperated after three days of protracted legal discussions with a client who was insisting on an unlimited liability clause in a temp staffing contract. The agency would consequently be responsible for all damages, fraud or theft conducted by the temp. This could be a ticking time bomb for agencies willing to operate on these terms.



Kean Marden, head of UK research, Singer Capital Markets