Let’s make no bones about it, the UK recruitment sector has been hit by a ‘perfect storm’ over the past 6 months. Brexit, a snap General Election, delays to major infrastructure projects (eg HS2), falling car sales, a manufacturing recession and lower aerospace orders, reflecting the temporary halt in production of the Boeing 737 MAX.
In fact, we heard as much on Monday, when STEM rival SThree warned that UK NFI had dropped -11% in the quarter ending Nov’19. Similarly today, Gattaca reported that its UK NFI had declined -11% for the 5 months to Dec’19, and now anticipates FY20 adjusted PBT to come in at c. £6m vs consensus of £10m.
Adding that “the market has not recovered as quickly as expected and short-term growth remains uncertain, despite the decisive result in December’s General Election. The timing of UK investment in major infrastructure projects is still not clear and certain manufacturing, automotive and rail [re start of CP6] sectors continue to be impacted by a lack of confidence. In addition, there is continued uncertainty surrounding IR35, [which is scheduled to go-live on 6th Apr’20 for private businesses employing 50 or more staff, & with >£10.2 turnover].”
Clearly this is disappointing, however it’s not all bad news. Firstly, the lower activity levels mean there is likely to be a working capital unwind this year, which we reckon will reduce FY20 net debt to £25m (or 2.7x EBITDA) vs £30m before. Next, additional cost & cash savings are being considered that would also hold the group in good stead, once this mini Cat-1 squall has blown itself out. While in the meantime, we understand Gattaca should remain comfortably within all its agreed banking covenants.