Just the job - recruitment stock picks (part 1)
Recommendation
Margins to decline
But, while business is booming, it's not all plain sailing. For one thing, the industry is highly competitive, so we expect margins to come under pressure from time to time as has been seen by a number of companies in the industry already. Secondly, careful attention must be paid to cash flows - while companies get paid monthly, they generally have to pay their staff every two weeks.
Then there's the difficulty, common across the service sector, of getting strong productivity gains and the cost of constantly trying to stay ahead of the pack by using new technologies to drive the growth of their businesses. So, if you want exposure to the sector, picking the right stock is crucial.
In this issue we'll review, Recruitment Solutions and the newly listed Catalyst Recruitment Systems. In the next issue we'll take a look at Candle Australia, TMP Worldwide (formerly Morgan & Banks) and Skilled Engineering.
Growth ahead for REC
As in any sector, smaller companies tend to get less attention than their larger cousins and that's certainly true of Sydney-based Recruitment Solutions. Since our last review in issue 20 (Accumulate - $1.42), the share price has hardly put in a stellar performance, especially when compared with a company like Candle. The reason is not just its smaller size but its niche - the accounting and finance sector.
While the company won't be making much money from the onset of the Y2K bug, it is well placed to capitalise on the introduction of the GST, with the demand for accountants and finance personnel likely to increase.
Operationally, the company has not disappointed since listing either and it seems to have a sound expansion strategy centred on gaining a national profile.
The company is well established in Melbourne and Sydney, has recently opened an office in Adelaide and is trying to get a foothold in Perth through an acquisition. Considering forecast EPS growth of 15%, we don't believe the stock is trading on excessive valuations and would recommend subscribers continue to ACCUMULATE.
A catalyst for growth
Catalyst Recruitment Systems Ltd, a Melbourne-based company that we haven't reviewed before, is perhaps typical of the way non-Internet companies have been received upon listing. At an issue price of $1.00, they subsequently closed their first day of trading at just $1.01 - not what you would call a huge stag profit. Since then, while they've gone as high as $1.20, trading just above the issue price has been the order of the day.
Catalyst suffers from the same sort of problems as Recruitment Solutions. It places boilermakers, fitters and turners, not IT managers and webmasters, and has a market capitalisation of less than $30m, perceived by many as being too small to bother with. We feel, though, that what the company lacks in size and sex appeal, it more than makes up for in growth potential, if prospectus forecasts are met that is. During recent years, offices have been opened in all Australian capital cities and the company now ranks among the top 10 participants in its core business nationally, and is one of the leaders in Victoria.
Acquisition-led growth
But life hasn't always been easy. During 1997/98, competition took its toll and profitability at the EBIT level declined, although margins have now stabilised and revenue is on the rise. Growth by acquisition is also likely as the fragmented nature of the recruitment industry throws up opportunities - although finding the right business at the right price isn't an easy task. Earnings per share are forecast to climb from 7.6 cents for the year to 30 June 1999, to 10.3 cents during FY00 - an impressive growth rate of over 35%. From this, dividends during FY00 of 6.5 cents per share are forecast, a yield of 6.5% at current prices.
If, (and it's a big 'if') prospectus forecasts are met we expect that Catalyst will eventually have its day. After all, for some time after listing Recruitment Solutions' share price was also rather lethargic before investors decided to take a second look. There's a good chance that history will repeat itself with Catalyst and on this basis, we're happy to suggest patient investors ACCUMULATE.