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In Q124 (Dec to Feb), Group net fees were down 6% YoY (all changes at constant currency), reflecting both a strong comparator (with a record level of net fees in Q123) and the ongoing challenging backdrop. The 6% net fee decline would have been 5% excluding restructured businesses.
SThree plc
SThree's in-line trading update did not yield a meaningful improvement in market conditions. Contract extensions, wage inflation and fee rate commentary are encouraging and suggests the labour market in highly skilled, technical roles could perform well as candidate confidence improves. We believe
Highlights. Versus a record comp, Group NFI declined 6% LFL yoy to £93.7m (-5% excl. restructured markets), with Contract (84% of Group) continuing to outpace Perm at -2% (sequentially stable vs Q4). Within the mix, the ME&A performed strongly at +20% (Japan up an impressive 41%), with the Netherlands remaining in growth territory at +6%. As anticipated, Germany and the US continued to be weak (driven mainly by Technology (Germany) and Life Sciences (US)). Engineering (29% of Group) continued to see “strong demand across both Contract and Perm”. With avg. headcount -12% yoy (but flat vs. Q4), productivity remained elevated, with SThree selectively managing churn. Strong contract extensions. Whilst new business levels remained soft, this was largely offset by the strength of Contract extensions - thereby underscoring the demand for flexible STEM talent, globally. Importantly, the order book currently stands at £184m (-1% yoy, an improvement vs. FY23 y/e at -3%), providing “sector leading” visibility (c.4 months of NFI). Given this, and today’s Q1 outturn, we estimate SThree has c.55% of FY24 consensus NFI secured. FY in-line. Albeit predicated on an uptick in new business levels Q2/24+, we reiterate FY24/25/26E on the basis of today’s in-line outlook (we sit c.1% ahead of CC-cons FY24 PBT). We model c.3 ppt margin accretion FY24-26E inclusive (c.20% conversion FY26E) on an undemanding 3-yr NFI CAGR of c.3%. BUY reiterated. We continue to view SThree as a uniquely positioned UK-SMID play on the global STEM thematic, with an operating model skewed in favour of Contracting which gives rise to a sizeable economic moat. We remain BUYers, and continue to view the valuation disconnect (pg. 3) as an attractive entry point, especially given the yield and balance sheet strength (£97m net cash). We see a pathway to >21% conversion FY27+ given SThree’s positioning in secular growth markets and post-TIP productivity benefits. 530p PT reiterated.
SThree’s contract business has continued to perform resiliently in Q1 24E, but permanent recruitment was tougher than we expected. Contract extensions were strong across markets, but new business wins remain under pressure. While there are signs of improving sentiment in the US, Germany is still difficult. We cut our FY24E NFI by 2%, but maintain our EBIT conversion rate at 17.0%, leading to a 3% cut to FY24E PBT. Despite the cut, a resilient performance with the longer-term growth opportunity firmly intact. CY24E EV/EBIT (ex leases) of 6.9x is cheap. TP cut from 575p to 565p. Maintain Buy.
In FY23, SThree’s net fees (constant currency) declined by 4%, and although the trading environment remains tough, we note that across the last four quarters it delivered a better net fee performance than the average of the quoted UK recruitment peers (Hays, Page and Robert Walters), reflecting its more defensive profile, especially its focus on Contract (82% of net fees) and STEM sectors.
SThree produced a resilient set of FY23 results, with a 2% underlying PBT beat. Current trade remains difficult, with no signs of an inflection point in key markets yet. However, there is a solid contractor order book, giving good visibility into H1 24E, the Technology Improvement Programme is on track and the balance sheet is rock solid, with counter-cyclical cash flows. We cut FY24E PBT by 3%, but this is still a robust earnings agenda versus peers. TP cut from 610p to 575p. The shares remain cheap on a CY24E EV/EBIT (ex leases) of just 6.3x. Maintain Buy.
SThree's results were in line with previously guided expectations on an underlying basis. Despite cautious optimism as recent as its Q4 trading update, consistent with its peers, market conditions for new business have remained subdued for longer than expected resulting in downgrades to our earning
Contract (incl. ECM) outperforming. Announced at the pre-close, vs. a record PY (+19%) comp and amidst a challenging macro, NFI was -4% LFL yoy at £418.8m (-3% ex-restructuring). Encouragingly, Contract (82% of NFI) grew 1%, a by-product of robust contract extensions (average salaries/contract length up yoy, with margins flat vs. FY22). Encouragingly, ECM also saw yoy growth (now c.37% of NFI). Geographical/vertical mix outlined overleaf. Cost control. A by-product of timing differences re TIP expenses (c.£3m), in addition to lower-than-anticipated commission payments and the release of certain provisions (following post y/e collections), EBIT came in c.7% ahead of INVe, at £76.4m (c.18.2% conversion). With strong cost control and productivity a mere c.2% lower yoy, we estimate that excluding the impact of the above (i.e., on an underlying trading basis), SThree would have come in marginally ahead. Balance sheet strength / DPS +4% yoy. Declaring an 11.6p final DPS (total 16.6p), +4% yoy, FY23 closed out at c.£83.2m net cash (FCF >£50m). And despite an element of this earmarked for working capital rebuild as markets recover, as well as the completion of TIP, in our view, SThree has the potential to materially improve its TSR profile - be that in the form of specials/buybacks and/or engaging in strategic M&A - none of which, in our view, is in the price. Forecast changes. Despite the contractor order book (£184m) providing a sector-leading c.4 months’ visibility, and with extensions holding up well over the Dec/NY renewal period, the fact that new biz “remains subdued”, in addition to i) c.£3m of incremental TIP costs now recognised in FY24E and ii) an expectation that productivity levels normalise with headcount maintained/added to, we revise FY24/25E NFI growth/conversion lower (FY24E conversion now assumed at 17.0% - i.e., still materially ahead of staffing peers). Net impact on FY24/25E EPS -c.9%/-c.9% respectively - more detail overleaf.
Despite a tricky trading backdrop that has not seen any material improvement over the last three months; SThree’s performance has remained consistent. New business remains soft with Q4 showing no material improvement vs Q3, whilst contract extensions / renewals continue to be a source of relative strength.
SThree's Q4 performance highlights an improvement in the rate of net fee decline and pre-tax profit in line with expectations. Faced with ongoing macro headwinds the consistency of contract extensions are encouraging and an indication that it is well-placed to benefit as markets start to improve. T
Q4 trading was resilient and in line with our expectations. We make no change to our FY23E PBT. The y/e contractor order book is down 3% and there are no signs of improvement in key markets yet. Pricing, salary levels and contract extensions are robust, but new business wins remain under pressure. We cut our FY24E PBT by 7% to reflect this, but still look for y-o-y NFI growth and EBIT conversion rate expansion. The balance sheet is strong with y/e net cash ex leases of £83m, the Technology Improvement Programme remains on track and the long-term structural growth opportunity in STEM markets is as strong as ever. A CY24E EV/EBIT of 6.3x ex leases is cheap. TP cut from 655p to 610p. Maintain Buy.
The trading backdrop for SThree through the last three quarters has been consistent; a challenging backdrop for new business, offset by resilience in contract extensions and renewals for the contractor order book. Q3 paints a broadly similar picture although the tone of commentary around new business is more optimistic and we can now see a clear sequential net fee improvement between Q2 and Q3 when we adjust for the offices restructured late last year (Ireland, Hong Kong and Singapore).
SThree's Q3 trading update highlights another period of resilient trading. Sequential stability in the rate of YoY decline and strong demand for roles in the engineering sector are encouraging. SThree's niche position in STEM markets has added resilience to the business not seen in previous cycles.
SThree has seen resilient trading with Q3 constant FX NFI down 7% y-o-y and -5% LFL. Contract NFI is flat y-o-y and the Contractor order book is also flat y-o-y, with the sequential improvement in new placement activity highlighted at the interims continuing, alongside robust contract extensions. Perm (16% of NFI) and Life Sciences remain difficult. We make no change to our FY23E PBT forecast. The balance sheet is strong with net cash of £83m, ex leases. The Technology Improvement Programme is on track and should underpin management’s EBIT conversion ambition of over 21%. The STEM and contract focus provide SThree with earnings resilience in difficult markets alongside exposure to secular long-term growth trends. This is not reflected in the valuation. The shares trade on a CY24E EV/EBIT (ex leases) of just 4.8x. Maintain Buy and 655p TP.
Headlines. Q3 NFI -7% LFL yoy to £103.0m - sequentially stable QoQ and with tough PY comps across most geographies. Importantly, excl. the impact of restructured businesses, NFI was -5% LFL, an improvement on Q2. Vertically - Engineering stood out at +20%, with Technology and Life Sciences both in negative territory (-6%/-24% respectively). The top 3 geographies now represent 73% of Group, with the Netherlands at +5% / Germany -6% / the US -19% (largely Life Sciences-driven, as flagged at the interims); however, all 3 regions saw Contract comfortably outpace Perm. The contractor order book remained flat yoy, providing good Q4 visibility and with new placement activity having seen sequential improvement QoQ. Whilst productivity was off 1% yoy (average headcount reductions of 6% helping), it is 38% ahead of Q3/19 – testament, in our view, to the management team’s operational blueprint, sustained order book levels and process efficiencies engineered post-Covid. Contract faring better. Reflective of the wider macro, as well as SThree’s targeted headcount investment, the strategic focus on Contract continues to pay dividends with Contract NFI flat yoy and having demonstrated sequential improvement QoQ. Conversely, Perm NFI declined 31% (avg. headcount down 21%), however, Japan - SThree’s only sole Perm market - fared better at -4%. TIP on track. Underpinning our margin assumptions (in that the company can attain Group conversion of c.20% in FY25E), Houston is now live, and we are encouraged that the sequenced rollout is “progressing in-line with stated plans”. Valuation/catalysts. We see SThree as well placed to continue to take market share given its balance sheet (c.£83m net cash) and positioning in secular growth STEM markets. The valuation disconnect vs. peers (Fig 1) - despite consensus indicating an above-sub-sector average FY23 conversion outturn - offers an attractive entry point for those willing to take a longer-term view, we believe. Peers report Q1/Q3 earnings mid-Oct. 480p PT and BUY retained.
SThree’s 3Q23 update highlights the benefit of the group’s Contract focus, with fees Contract fees flat YoY. In addition, the contractor order book has remained at similar levels. Meanwhile, the “Technology Investment Programme” is rolling out to plan. This should ensure that productivity levels can be enhanced on a sustainable basis. Overall, a tick in the box and no change to full year forecasts.
H1 results provide more detail, context and a more up to date take on the trading environment following the Q2 trading update. The results lay clear the extent to which SThree has been able to protect margins (unlike others in the peer group) despite the significant investment in the Technology Improvement Programme, which itself lays the ground for future margin outperformance.
SThree's H1 results were in line with commentary from its recent Q2 update. Despite a tough macroeconomic environment the contractor order book has stabilised and should provide support for trading in H2, while softer YoY comparatives could also ease the rate of decline in other metrics and placeme
H1 NFI (-2% LFL) and EBIT (£38.1m) were bang in line with our expectations, as were all other key metrics. The macro is tough, but contract extensions and pricing remain strong. The trend through Q2 was improving and this has continued in June. We make no change to our FY23E estimates. In a worst-case scenario, even if there were a 5% reduction to FY23E NFI, equating to a 25% EBIT hit, this would give a valuation of 460p (assuming 10x EBIT), still >30% above the current share price. Management has reiterated its margin ambitions and we maintain our view that the STEM/Contract focus offers excellent long-term growth potential. A CY24E EV/EBIT (ex leases) of 4.7x is too cheap. Maintain Buy and 655p TP.
SThree’s interim results highlighted the benefit of the group’s Contract focus. Whilst Perm net fees were lower in the first half (down 19%), Contract net fees continued to move higher in the six months to May-23 (up +3%). Meanwhile, the order book remains firm (£190m), and there has been a “modest improvement in new placement activity”. Pre-tax profits were £39m, in-line with expectations and we are leaving our SThree full-year estimates unchanged.
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The H1 trading update has confirmed the trends seen in the Q1 update. Contract extensions and renewals continue to outperform initial expectations whilst new business activity remains challenging.
Meeting Notes - Jun 20 2023
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A focus on contractor activity and exposure to stronger regional markets such as Germany and the Netherlands resulted in a resilient trading performance. Acknowledging a tougher permanent placement market we lower our estimates and reduce our price target to 600p, but with EV/Net fees attractive, w
SThree Q2 constant FX NFI declined by 7%, with Contract down just 1%, but Perm down 25%. Life Sciences remains weak, but Tech and Engineering have been resilient. The net cash performance was strong (£72m, ex leases), reflecting the counter-cyclical nature of cash flows. Given tougher trading conditions, we cut our FY23E NFI forecast by 7%, which drops through to an EPS cut of 8%. The Technology Improvement Programme remains on track. The relative strength of the STEM-focused, contract model was proven during the pandemic and continues to be seen. The longer-term structural growth story is absolutely intact and a CY23E EV/EBIT of 5.6x (ex leases) is too cheap. TP cut from 725p to 655p. Maintain Buy.
SThree’s 1H23 update highlights the benefit of the group’s Contract focus. Whilst Perm net fees were down in the first half, Contract net fees modestly grew in the six months to May-23. That said, quarter-on-quarter trends are softening, and we are reducing our FY23 PBT from £80m to £72m.
Against a softening macro backdrop, the solidity of SThree’s Q1 net fee outcome; +4% YoY at constant currency (+9% post FX), speaks volumes to the resilience of SThree’s differentiated focus on both Contract (now 81% of net fees) and STEM disciplines. There are a number of moving parts beneath the headlines – Contract growth vs Permanent declines as well as a degree of regional variation – nonetheless the Q1 outcome was consistent with our full year expectations and we leave our estimates unchanged.
SThree has reported Q1 constant FX NFI up 4%, with Contract (81% of NFI) up 8% and Perm down 12%. Contract was up in all regions, despite tougher trading conditions, with extensions more than offsetting pressure on new business. The order book is up 5%. This dynamic highlights the resilience of the SThree model through the cycle. We make no change to our FY23E forecasts, which are cautiously set, reflecting the volatile macro. The technology improvement programme remains on track. The cash performance has been strong, again. SThree remains our top pick amongst the professional recruiters. A CY23E EV/EBIT (ex leases) of 6.2x is too cheap. Maintain 725p TP and Buy.
SThree's Q1 trading performance represents a robust start to the year. Weakness in perm has been more than offset by continued strength in contract. Market trends are consistent with its peers, but the visibility afforded by the contract order book suggests that YoY fee growth is still achievable a
Contract strong. Good growth in SThree’s two largest regions, together c.49% of Group (Germany +7% / Netherlands +4%); encouragingly, Tech (+8%) and Engineering (+19%) both held up well too. With an 81% NFI skew towards Contract (+c.3 ppts QoQ), the fact that the order book continued to see healthy yoy growth (+5%) is also encouraging (Contract NFI +8%). Perm struggled at -12%, however we estimate that c.50% of this decline could be attributed to the planned transition from Perm to Contract in several markets. The rest of said Perm weakness is largely confined to the US (-6% Region / Perm -40%) and Life Sciences (-15% Region / -39% Perm). Headcount was c.2% lower QoQ (LFL); in-line with commentary at the FY results however, we do not expect any material pull back in headcount as a result of near-term softness. Outlook encouragingly in-line. Today’s print marks the 5th sequential softening in quarterly NFI growth, however we note the PY comp was tough (+29%). We reiterate our forecasts out to FY25E given the in-line outlook; we model c.4% yoy NFI growth (FY23E) on flat margins. Given the order book and strength of contract extensions seen in Q1, this ought to provide a good level visibility moving into Q2 (March an important contract extension month). We believe SThree’s limited exposure to APAC is helpful (particularly near-term), whilst its limited ‘Big Tech’ exposure is also advantageous in the US. Attractive entry point. SThree’s valuation remains appealing despite the comparably strong run of form (shares +c.5% LTM). On a NTM P/E basis, the company trades below the wider sub-sector (c.10x vs. c.13x) despite continued strong trading as well as its Contract / STEM skew. On the basis that macro conditions remain as they are / improve, we believe the shares continue to be mispriced; our unchanged 530p PT implies an undemanding FY23E P/E of c.10.7x and EV/NFI of c.1.2x; both below long-run average levels. A de-risked balance sheet (c.£64m net cash) and yield of c.4% adds to the appeal. BUY.
SThree, the specialist STEM/flexible working recruiter, started the year on a firm footing, with the Contractor order book underpinning activity. Net fees were up +4% to £102.6m, in line with our forecasts. Whilst net fee trends have softened, there remains numerous growth opportunities within STEM.
SThree is focused on two strong inter-related staffing markets: STEM and flexible contracting employment. Historic trading data demonstrates the benefits of this business model, with SThree delivering superior growth over the longer term and enjoying greater resilience during periods of uncertainty. Given the acceleration in demand for STEM candidates and acute skill shortages, plus the increasing adoption of flexible contracting employment models, we anticipate SThree’s outperformance will be maintained. Meanwhile, its disciplined headcount allocation and investment in the digital delivery platform should help enhance the conversion ratio.
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Final results show a performance that was significantly ahead of expectations at the start of the year. SThree also provided a great deal of detail around the technology improvement programme. This significant investment (£26m - £31m over the next two years with £4m already expensed) is a fundamental driver behind SThree’s strategic growth and margin ambitions and could see SThree move beyond a linear relationship between growth and sales headcount.
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SThree’s investor briefing on its technology improvement programme gave further detail on the investment that is being made and why management is confident that an EBIT conversion rate of at least 21% can be achieved by FY24E. The focus is on driving productivity of new joiners – this alone could justify the investment. However, there are plenty of other benefits, including leveraging the back office, which could drive margins higher still. Our estimates do not yet factor in the upside. The shares are cheap on a CY23E EV/EBIT (ex leases) of 6.1x. Maintain Buy, 725p TP.
Data-driven decision making. Per Figures 1 and 2, in our view, the rollout of the company’s Mercury CRM (Microsoft Power) platform serves as a strong differentiator vs. peers by providing “unique Employed Contractor Model capability” (arguably critical given SThree’s strong skew to Contract - c.78% of FY22 NFI), and a workflow geared towards i) an enhanced candidate experience and, ii) engendering productivity improvements across the consultant base (e.g., via ‘prompts’ to guide new recruits through phases of the process flow that would otherwise be a drain on senior consultant time). Empowering new recruits, inhibiting churn. SThree flagged that the take up of the CRM pilot has been positive, and as the roll-out advances, we expect this will help inhibit consultant churn (currently mid-thirties, in-line with sector norms) on the basis that i) process flows are more intuitive, ii) new recruits are able to attain full productivity faster, and, iii) lead gen is enhanced. FY22 conversion held back, but TIP a long-term growth driver. Management flagged that, had it not been for TIP, FY22 conversion would have been c.100 bps higher; however, investment (c.£30-35m total expenditure FY22-FY24) is expected to pay back in relatively short order (positive ROI in FY25), with some economic benefit anticipated from FY24. Upside risk to our forecasts. Per our FY22 results note, we expect SThree to attain its 21% conversion target by FY25E (not FY24E). Management’s working assumption is that FY23 conversion would be c.150bps higher (at c.19.5% vs. 18.0% per BBG consensus) had it not been for TIP (Figure 3). SThree believes that by shortening the ‘time to productivity’ gap on new recruits, this could yield c.£12m of incremental EBIT - and we concede that, with TIP, this could materialise faster than our base-case, all things being equal. Moreover, with improved financial analytical capability and billing processes, we believe there is the potential for DSOs to also reduce (vs. our base case), thereby improving cash generation / FCF.
FY22 Results were in line with expectations. Consistent with its peers, forward indicators are moderating but SThree's contractor-led model has provided a resilient outlook. We make no changes to forecasts and a forward EV/Net fees multiple of 1.1x is attractive.
SThree has delivered a strong FY22 performance, in line with expectations. NFI grew by 21% and PBT by 28% as margins expanded, despite IT investment and various restructuring costs. Management will provide more details on the IT investment at a 1pm briefing today. The programme is running to plan, with benefits expected to support the >21% EBIT conversion ratio by FY24E. Current trade is in line. We make no change to our PBT estimates. SThree remains our top pick amongst the professional recruiters and is cheap on a CY23E EV/EBIT (ex leases) of 6.0x. Maintain 725p TP and Buy.
SThree, the specialist STEM/flexible working recruiter, delivered a decent finish to FY22, with a record net fees performance. Whilst net fee trends softened later in the quarter, there are numerous growth opportunities within STEM and management continues to plan further (targeted) headcount investment.
30 January - 3 February 2023
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A strong finish to the financial year yields FY fee growth of 19% YoY and fees c.25% above pre-pandemic levels. SThree is well-positioned to take advantage of high demand for STEM talent over the medium-term. We believe that softening trading conditions are already reflected in the share price, whi
SThree has delivered a strong Q4 with NFI +9% constant FX and +15% reported, ahead of our expectation of +9.7% reported. In £m terms, Q4 was a record quarter and the contractor order book is up 19% at the y/e. We make no change to our FY22E or FY23E PBT forecast, but note that our FY22E estimate has increased by 21% since the start of 2022. We maintain our view that SThree’s STEM and contract-focused model has proven its resilience through the pandemic and is well-positioned for a tougher macro environment. A 5.6x CY23E EV/EBIT is too cheap for the longer-term growth opportunity. Maintain 725p TP and Buy.
Our take. Overall, a strong year, with Contract reporting sequential, double-digit growth for seven consecutive quarters (Q4 +14% yoy, and that is despite the tough PY comp). Tech and Engineering also saw good yoy growth (+23% and +27% yoy respectively for FY22). The strength of the y/e order book is also important, in our view, as it provides earnings visibility moving into FY23, as well as more broadly serving as an indication of robust demand for skilled contractors. Perm softened in Q4 (-5% yoy); however, we note the tough PY comp here too (+25%) and Perm/Temp headcount reallocation (see below). Forecasts unchanged. We await further colour around conversion/PBT before updating our FY22E forecasts (and releasing FY24E). And whilst we note the outlook statement commentary, we continue to view our FY23E margin assumptions (c.18.3%, +c.20 bps yoy) as relatively undemanding, especially given SThree’s cautious approach to its headcount rebuild post-Covid (still below pre-pandemic levels), thereby providing optionality moving into next year should candidate confidence and/or consultant productivity wane. As noted in the statement, the pivot of some headcount from Perm to Temp (e.g., in the US) should also give rise to a margin tailwind in FY23E. Valuation/catalysts. As stated in our CMD note, on the proviso that one believes the market tightness currently being exhibited across SThree’s core end-markets persists into FY23, we continue to view the shares as good value; SThree trades on c.10x NTM P/E (vs. c.15x -5YR avg.), thereby, on our unchanged forecasts, implying c.16% yoy EPS growth. Our unchanged 530p price target is not overly demanding either, in our view, particularly given the strength of the Company’s balance sheet (£65m net cash) and positioning in structural growth markets. FY results slated for 30-Jan.
SThree, the specialist STEM/flexible working recruiter, delivered a decent finish to FY22, with a record net fees performance. Overall net fees were up +9.0% to £116m, £5m ahead of our forecasts. Whilst net fee trends softened later in the quarter, there are numerous growth opportunities within STEM and management continues to plan further (targeted) headcount investment.
At its investor briefing this week, SThree laid out the reasons why its focus on STEM and flexible working provides a long-term secular growth opportunity and a highly differentiated recruitment model. In this note, we pull together charts from Germany, the Netherlands and the US (together 73% of SThree’s NFI) which back up management’s thesis. Despite a recent rally, the shares remain cheap on a CY23E EV/EBIT of 5.5x. This is in the context of cautiously set forecasts, exposure to long-term structural growth, a contractor model that is less geared into the cycle than perm, £63m of FY22E net cash and counter-cyclical cash flows. Maintain Buy and 725p TP.
SThree hosted an online investor briefing highlighting the benefits of being focused on two strong inter-related staffing markets: STEM and flexible contracting employment. Historic trading data demonstrates the value of this business model, justifying management’s ambition to maintain net fees income growth “faster than the peer group”.
Strong market positioning, but low market share. With the global STEM market valued at >£100bn, the strength of SThree’s market positioning (77% NFI skew towards Contract) was the main point that stood out to us yesterday; #1 in the Netherlands and #2 in Germany and yet, despite this, the Company has only c.2% market share across the top five STEM markets globally. In our view, the potential for market share accretion is clear, underpinned by the Company’s well-publicised investment plan (specifically re digital infrastructure and people) and the secular growth drivers alluded to on pg. 2. US ‘Big Tech’ layoffs could prove a net positive...to the extent that SThree doesn’t directly service this end-market but could benefit from an increase in candidate supply (more developers etc). Moreover, in terms of cyclical gearing, the Company noted that a number of its verticals (e.g., Life Sciences) exhibited counter-cyclical qualities throughout Covid, and hence, despite the adverse near-term macro, they expect this trend to continue, amplified by the skills shortage dynamic. In our view, gearing towards Contract may also prove to be beneficial from a balance sheet perspective - given the working capital unwind - should NFI suffer in the immediate term (although there is nothing at the Q3, or from reading across to our wider coverage, to suggest this). Valuation/catalysts. Despite having outperformed the wider peer group YTD (-11% vs. -19% on aggregate), SThree continues to trade well below long-run average NTM P/E levels (c.11x vs. c.15x) - for this, investors get c.16% compound EPS growth, which we think represents good value…on the proviso that one believes said market tightness will persist. 530p TP retained, implying an undemanding c.13x FY23E P/E. Q4 update due out mid-Dec.
SThree’s scheduled Q3 update has painted a reassuring picture of sustained, positive net fee momentum despite a challenging macro backdrop. The consistency of growth, from across the breadth of the group and against the context of tough, non-Covid impacted, comparatives is striking.
A further period of strong trading has resulted in another earnings upgrade. The STEM market remains highly attractive and SThree is well-placed to benefit from skills-shortages prevalent in the market. While recruitment shares remain out of favour we believe valuations already anticipate a peak-to
Momentum at SThree continues to surprise on the upside. Q3 NFI growth was 22.9% (19.0% LFL), well ahead of our 8.0% estimate. All markets continue to perform strongly. Costs remain in line with guidance. Cash generation has again surprised on the upside. We increase our FY22E adj. PBT estimate by 7% to reflect management guidance. Estimates remain cautiously set, given the contractor order book at the end of Q3 was up 24%. The market remains fearful of a slowdown, but this is more than priced into a CY23E EV/EBIT of 4.6x and takes no account of the longer-term secular growth potential within STEM markets. We raise our TP from 675p to 725p. Maintain Buy.
Highlights. Group NFI +19% LFL yoy (vs. PY comp of +29%) to £111.8m, with continued growth yoy in the Group’s three largest countries, together c.73% of Group fees (Germany +13% / USA +9% / Netherlands +36%). Encouragingly, Tech and Engineering both held up well (Tech +25% / Engineering +25%) with Life Sciences (unsurprisingly) growing at a lower quantum (+2%) given the strong, Covid-related PY comp. With a 77% NFI skew towards Contract, the fact that the order book saw healthy yoy growth (+24%) is also encouraging, with Contract fees +21%. Balance sheet strength with £57m q/e net cash. Headcount / vertical skew ought to provide margin insulation. With headcount still below pre-Covid levels (+4% QoQ), and with a skew towards, arguably, the most in-demand verticals (the latest ManpowerGroup survey flags IT and those with “technology skills” as likely to experience the greatest hiring demand in Q4), we believe SThree is comparatively insulated (from a conversion perspective) from the impact of near-term macro shocks, with headcount investment over the next 12-18 months likely to be highly targeted. Forecasts. The statement flags further improvements in consultant productivity (+5% in Q3), with FY expectations now c.7% ahead of consensus at the PBT level (we understand that time-to-hire and contractor margins have both held up well). Pre-statement, we sat towards the top end of consensus and hence upgrade FY22E PBT by c.6% and FY23E PBT by c.4% (Fig 1), implying conversion on slightly higher net fees of c.18.1% and 18.3% respectively, and thereby edging closer to the FY24 target conversion of 21%+ (not modelled). BUY reiterated. Despite i) the strength of recent trading (and upgrades), and ii) ostensibly favourable macro conditions (low unemployment, skills shortages) demonstrating a favourable market backdrop, SThree’s shares have sold-off materially YTD (-c.25%). We also note the P/E compression across the sector (Fig 2), with SThree now trading well below long-run average NTM P/E levels (c.9x) - for this, investors get c.16% compound EPS growth, which we think represents good value…on the proviso that one believes that market tightness will persist. 530p TP retained, implying an undemanding c.13x FY23E P/E.
SThree, the specialist STEM / flexible working recruiter, continues to enjoy good momentum and has delivered its strongest ever quarter. Net fees were up +19% YoY (CFX basis). The contractor order book (£176m) was up +24% YoY. This points to ongoing strength in the STEM labour market. Net fee momentum, the strength of the order book and productivity gains mean that SThree is trading ahead of expectations, and we are raising our FY22 PBT forecast by +7.0%.
CEO Video - SThree, Global Oil Gas and LNG, Commodity snapSHOT, Restocking Indicator, SSP Group, Keller, SigmaRoc, Ricardo, Atlantic Lithium, Bango, Market Highlights
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CEO Video - SThree, Global Oil Gas and LNG, Commodity snapSHOT, Restocking Indicator, SSP Group, Keller, SigmaRoc, Ricardo, Atlantic Lithium, Bango, SMID Market Highlights
Timo Lehne, CEO of SThree, discusses the highlights from a record set of interim results. He details the benefits of the IT infrastructure investment that is being made in H2.
SThree’s H1 results had been flagged at the Q2 update; with +20% net fee growth delivered across all the group’s key regions. However, the H1 results were especially notable for the 22% EBIT margin, as the group benefits from heightened productivity.
SThree's H1 Results illustrates the benefits of its position in the highly attractive STEM market, where skills shortages in technical roles persist. Activity remains strong and visibility is supported by a 35% YoY increase in the contract orderbook. We see upside risk to forecasts, an attractive v
SThree, Judges Scientific, Fuller Smith and Turner, Science Group, SMID Market Highlights
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SThree has delivered a very strong H1 with PBT up 60% (64% LFL) to £44.3m, ahead of expectations. Management remains confident in the outlook and we make no change to our FY22E growth assumptions. We increase EPS by 6% to reflect a lower tax rate. IT investment remains on track, with costs H2 weighted. Management has re-committed to a FY24E EBIT conversion rate of >21% (FY22E 17.6%). Our estimates are cautiously set and the share price is already discounting considerable downside risk. A CY22E EV/EBIT of 6.3x is too cheap for the long-term growth on offer. Maintain 675p TP.
SThree, the specialist STEM / flexible working recruiter, continues to enjoy good momentum. In terms of both net fees (£203m) and EBIT (£44.6m) the recruiter has delivered its strongest ever first half performance. With the contractor order book (£182m) up +35% YoY, SThree is well placed to sustain its double-digit net fee growth and we are maintaining our recently upgraded profit forecasts.
SThree’s trading performance continues to stand at odds with the share price performance. +25% net fee growth in H1, combined with continued productivity growth driving short term margins have led to further earnings upgrades.
FY22 confirmed ahead of expectations by “at least 5%”. Q2 NFI +23% LFL yoy (+25% LFL yoy in H1) - impressive, in our view, given the strong, non-Covid impacted PY comp (+22% LFL in Q2/21). In Q2 specifically, Germany / US / Netherlands - SThree’s core geographies - remained strong (+20% / +16% / 38% respectively), and now represent c.73% of Group NFI. Interestingly, Contract outperformed Perm for the second consecutive quarter at +29% vs. +5%, with Contract NFI now representing 77% of Group NFI (unch vs. Q1). The statement also notes that the contractor order book was up 35% YoY, “reflecting ongoing high demand for skilled contractors”. Headcount increased by 2% QoQ (+10% for H1), with investment, unsurprisingly, primarily in Contract consultants (c.800 net contractors added H1). As previously alluded to, whilst productivity increased 14% yoy, the Group expects this to mediate over time as investment continues (reflected in our FY23E forecasts). Net cash confirmed at c.£48m (-c.£10m HoH, reflective of the working capital outflow incurred given the Temp-book rebuild). Forecasts. Despite the uncertain macro backdrop, we understand that markets/activity levels across the Group’s core geographies (noted above) have remained hot - especially in Engineering and Technology contracting. We upgrade our forecasts to reflect the guidance in today’s statement, a combination of i) slightly stronger fee growth (Management confirmed no deterioration in activity levels throughout the quarter, with contractor salaries increasing c.6% yoy (though not LFL)), and ii) higher-than-anticipated levels of consultant productivity/placement rates. We increase FY22E NFI by c.6% to £414.5m, with conversion +c.40 bps to c.17.5%, implying adjusted PBT of £71.6m (+c.9%). This flows through to FY23E (EPS +c.6%), holding conversion unchanged at c.18%. Valuation/catalysts. Akin to the wider recruitment sub-sector, the shares have been under pressure YTD (-c.28%), and that is despite recent lead indicators re tight labour markets etc. remaining robust. Given that the Group hasn’t seen a drop-off in activity levels throughout the quarter, we see material value in the shares at these levels (NTM P/E 9.7x - below long-run levels) and thus retain our BUY rating and 530p TP (implying a FY23E P/E of c.13.9x). Interims 25-Jul.
SThree's impressive Q2 trading update and outlook contrasts the broader macro uncertainty. It highlights the value of a focus on a niche, highly skilled part of the recruitment market and a contractor model that provides higher visibility. An earnings upgrade based on H1 trading is unexpected and r
SThree has delivered another very strong quarter of growth, ahead of expectations. The contractor order book at the end of Q2 is up a very encouraging 35% and we raise our FY22E PBT estimate by 9% as a result. Our H2 estimates remain cautiously set and a CY22E EV/EBIT of 5.1x is already pricing in material downgrades. We maintain our view that SThree’s STEM focus gives it exposure to long-term structural growth which is not reflected in the current valuation. TP raised from 635p to 675p. Maintain Buy.
SThree, the specialist STEM / flexible working recruiter, continues to enjoy good momentum and has delivered its strongest ever quarter. Net fees were up +23% YoY (CFX basis). The contractor order book (>£180m) was up +35% YoY, pointing to ongoing strength in the STEM labour market. Given the record first half performance and the strength of the order book, SThree is clearly trading ahead of expectations and we are raising our FY22 PBT forecast by 8.0%.
20 - 24 June 2022
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Growth across all geographies and regions Today’s statement highlights Q1 net fees +c.29% LFL yoy to £93.8m, driven largely by the continuation of the Group’s “execution of strategy and reflecting the ongoing strength in new placement activity”; today’s growth rate marks the 4th consecutive quarter of LFL NFI growth in excess of 20% (however, Q1 was by-and-large unaffected by negative Ukraine sentiment). Encouragingly, given STEM’s NFI skew, Contract fees (c.77% of Group NFI) increased c.32% LFL, outperforming Perm (+c.18%), with the Group’s contractor order book +c.42% yoy, underpinning the “confident outlook”. Headcount increased c.8% yoy (+c.2% QoQ), which is congruent to the comments made by Management at the time of the FY21 results re an element of consultant hiring having shifted from FY21 into FY22. In terms of productivity (+c.19% yoy), as expected the Group has seen “some normalisation, as new hires come on board”, although as flagged, it remains well above historic levels. Period-end net cash of c.£41m, in our view, continues to provide the Group with a good capital buffer as the temp book continues to unwind, whilst also providing scope for increased/special dividend distributions and/or capital investment. Within the mix… STEM’s five core markets (Germany +c.24% / USA +c.27% / Netherlands +c.45% / UK +c.29% / Japan +c.78%) all delivered “very strong yoy growth”, with solid momentum across all “key sectors” also reported - Technology (+c.30%), Life Sciences (+c.23%) and Engineering (+c.31%). Unsurprisingly, DACH delivered strong growth (+c.26%), as a result of “outstanding” contract performance (+c.40%). The US (the world’s largest STEM staffing market) also saw robust net fee growth (+c.27%), whilst APAC increased +c.71%, with Japan - the largest country in the region - highlighted as the standout performer. Forecasts / Recommendation / TP unchanged No profit performance was disclosed in today’s statement (as usual), but the continued “strength in momentum throughout Q1, in-line with the Board’s expectations” and the “minimal direct exposure to the war in Ukraine” flagged in the outlook statement provides reassurance (tallying with the comments from wider sub-sector constituents (e.g. RWA / PAGE) that reported FY results recently). In light of the above, and the in-line sentiment of today’s outlook statement, we do not expect consensus to move materially today and therefore we elect to leave our forecasts / recommendation / TP unchanged at this time. Q2/H1 results slated for 20-Jun-22.
Global recruitment activity remains strong, and supported by wage inflation, SThree grew fees by c.29% YoY in Q1. High exposure to the US and Germany, which combined represent c.56% of fees should be attractive to investors, and sub-sector valuations have de-rated prematurely, in our view. We reite
Q1 NFI was up a very strong 29% (constant FX) with the period end order book up 42%, boding well for Q2. Investment plans remain on track. We make no change to our estimates, given macro and geopolitical uncertainties. However, this leaves our forecasts very cautiously set, given current momentum and we would expect to see upgrades through the year. SThree’s exposure to structural growth in STEM markets is a key differentiator. CY22E EV/EBIT of 7.2x is too cheap. Maintain Buy and 680p TP.
SThree, the specialist STEM / flexible working recruiter, continues to enjoy strong momentum and has delivered its strongest ever first quarter performance. Net fees were up +29% YoY (CFX basis). The contractor order book (c£170m) was up +42% YoY, pointing to double digit growth in net fees for FY22. Meanwhile, SThree continues to invest in the platform, both in terms of headcount and infrastructure, thereby ensuring growth can be maintained.
Timo Lehne – Interim CEO of SThree Plc – discusses the highlights from the FY21 results, what differentiates SThree from the traditional professional recruitment model, SThree’s main growth drivers and its prospects for the current year.
Although the record net fee outcome (£355.7m, +19% pre FX) had already been announced at the last trading update; final results today show a better than expected outcome further down the P&L with PBT coming in ahead of our upgraded expectations (PBT £60.0m vs Radnor £59.3m). Top line trading performance continues to be strong, and SThree has raised net fee growth expectations for FY22 to double digits (consensus had been looking for c.8%). Margin performance in FY21 was better than we had been expecting and we take FY21 margins as our new baseline for FY22. We note the continuing and consistent guidance around internal investment building in FY22 (1% - 2% of net fees) and we therefore continue to expect flat margins in FY22 before expansion in FY23. Net net, we upgrade our estimates by c.5%.
Meeting Notes - Jan 31 2022
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SThree, Sylvania Platinum, XP Power, Volution, Lookers, Knights, Gemfields, Cerillion, SMID Market Highlights
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SThree's FY results highlight record Group profit and a strong outlook which could yield double-digit profit growth in FY22E. The contractor orderbook remains strong and provides the opportunity to gain market share throughout its network, particularly in high growth markets such as Germany and the
FY21 results were in line with our top-end forecasts. Importantly, we have clarity on the shape of numbers in FY22E and beyond. FY22E has started strongly and double-digit NFI growth is now expected, along with a flat margin, despite 1-2% of NFI being invested. Management expects margin expansion in FY23E and beyond. We increase FY22E PBT by 4% and FY23E by 12%. Today’s update should assuage any concerns. The dip in the shares provides a buying opportunity. A CY22E EV/EBIT 7.3x is cheap. TP raised from 650p to 680p (13x CY22E EV/EBIT).
The new news. The main new news in today’s results is the FY21 PBT outturn at c.£60.0m; a record for the Group (+c.2% vs. our pre-statement estimate), alongside record NFI of £355.7m (reported at the Q4, also c.2% ahead). The usual suspects drove the outperformance, with Germany / US / Netherlands - of which Technology and Life Sciences were the standout verticals - over-indexing. Net cash increased c.15% yoy to £57.5m, despite a record contractor order book being a drag on working capital. FY DPS of 8.0p (total FY21 DPS 11.0p). Upgrading FY22E. Per Figure 1, we update our FY22E headline profit and cash flow forecasts to reflect guidance in the outlook statement of ‘double-digit’ NFI / profit growth yoy (NFI +c.8% / PBT +c.7%). We assume conversion remains flat yoy at c.17.1%, reflective of the temporary drag on consultant productivity levels given the investment (mainly graduates) that had shifted into FY22; SThree is aiming to add c.10% to its consultant base (c.300 heads) yoy, though, in our view, this could prove a tall order given the well documented ‘war for talent’ and increased levels of staff churn across the market. Oversold? In our view, the market overreacted somewhat to the Dec-21 trading update; the CEO’s departure is undoubtedly a loss, however one that isn’t insurmountable. The fact that we didn’t see another upgrade wasn’t a huge concern given we had upgraded FY21E EPS four times already in 2021. We reiterate our concerns on the attainment of the FY24 21-24% conversion target range, however, despite the potential for improved levels of productivity from near-term headcount investment and capex (upgrades to ERP systems etc.) further out. Our newly released FY23E assumes a yoy tick-up in conversion to c.18%, though this is still c.3ppts below the lower-end of the target one year out. Near-term visibility is extremely limited, however; in our view, a lot rides on the ability of new hires getting up to speed quickly, as well as macro conditions improving further (e.g. the market skewing more favourably re Temp/Contract - a record contractor order book at y/e suggests this is happening).
SThree, the specialist STEM / flexible working recruiter, continues to enjoy strong momentum. In FY21 SThree generated net fees of £355.7m (pre-announced within the 4Q21 update) and a pre-tax profit of £60.0m (slightly ahead of forecasts). Both were record performances. Progression was broadly based, both by geography and STEM discipline.
31 January - 4 February 2022
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SThree has announced a strong Q4 update. Net fee momentum has been maintained through H2 with the group comfortably ahead of the pre Covid comparative. Today we are upgrading our estimates (albeit marginally) for the fifth time this year. Productivity gains are the key feature of FY21 as internal investment lags net fee growth. FY22 will see some (but by no means all) of these productivity gains revert.
Meeting Notes - Dec 14 2021
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A strong Q4 performance continues the positive momentum experienced in recent periods and has seen SThree has recovered nearly all of the trading profit lost in the wake of COVID-19 in just 12-months. Operational gearing is tempered by investment over the next 12-months, but the share price reactio
Key messages Group NFI +19% LFL yoy to £355.7m (+9% vs. the FY19 FY comp), marking the 3rd consecutive quarter of >20% NFI growth with Q4 NFI at +25% and a record FY NFI outturn. Contract fees increased 17% LFL (Perm +24%), with Contract NFI representing 75% of Group net fee income at the period end. Within the mix - DACH delivered a “strong performance” (+24%), with the US (the world’s largest STEM staffing market) also +24%. APAC fees increased by 34%, with Japan singled out at +27%. Headcount increased c.6% yoy (following significant H2 investment); encouragingly however, FY21 saw productivity improve by 31% YoY - Management expect this improvement to ease per today’s statement, but to also remain above historic levels. The balance sheet remained robust with £58m of net cash at the period end (vs. c.£51m at Q3), with a “substantial working capital position” yet to unwind. FY21 profit in-line As usual, no profit metrics are disclosed in the statement; however, encouragingly, the statement notes that the Group expects to “deliver record profits for the full year, in line with consensus expectations which were materially upgraded in Sept-21”. Forecasts/TP/Recommendation unchanged Given the in-line trading performance (we sit c.2% below FY21 reported NFI / c.1% below FY21 company-compiled consensus PBT) and the relatively cautious tone of the outlook statement (“…although the external environment remains uncertain, we have proven that we can grow through periods of volatility and remain committed to the delivery of our strategy for the benefit of all of our stakeholders”), we do not expect a strong market reaction off the back of today’s announcement, especially given the exceptional run of form YTD (+83%). We leave our FY21/22E forecasts and HOLD recommendation unchanged for now (FY21 results slated 31st Jan). Our unchanged 580p TP implies c.8% FTR, with the shares currently trading on c.18x NTM P/E (i.e. marginally above previous cycle average levels, per Factset).
SThree has delivered another strong quarter with Q4 net fee income up 25% LFL, in line with expectations. FY21E PBT is expected to be in line with consensus. The contractor order book at the end of the quarter was up a very encouraging 43%, which bodes well for FY22E. We make no change to forecasts, but see scope for upgrades as the year progresses. CEO Mark Dorman is stepping down as of 31 December for personal reasons. Timo Lehne (DACH) provides a very high calibre interim CEO. CY22E EV/EBIT 10.3x. Maintain 650p TP and Buy.
SThree, the specialist STEM / flexible working recruiter, continues to enjoy strong momentum and has delivered its first even £100m net fee income quarter. Over 4Q21 net fees were +16.0% ahead of 2019 levels, highlighting the strength of the group’s focused business model.
13 - 17 December 2021
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Across all territories, STEM employment is growing more quickly than the wider economy. Expansion is being driven by a range of factors, including investment in healthcare and tech-driven disruptive business models. The USA is the world’s largest STEM market and remains remarkably fragmented, providing significant growth opportunities for SThree.
SThree’s exit from the pandemic continues to lead the peer group and this has been reflected by the share price which is now trading at all-time highs.
SThree’s exit from the pandemic continues to lead the peer group and this has been reflected by the share price which is now trading at all-time highs. A combination of strong execution through the pandemic and SThree’s positioning at a powerful nexus of scarce technical skills and flexible working are the key drivers. In our view, SThree’s fundamental drivers have been re-inforced by the pandemic and leave the group well positioned looking into FY22 and beyond. This now marks our fourth upgrade in 2021, underlining the extent of the net fee recovery (now ahead of 2019 on a YTD basis) and productivity boost as costs recover at a slower pace than net fees. There are timing issues at play here; not least with the full effect of sequential headcount growth unlikely to be fully felt until FY22. The current drop through rate implied by these upgrades (+70%) will not be sustainable. Although we are upgrading our outer year estimates, the gap between net fee and PBT upgrades is narrower than FY21. In share price terms, SThree has been the strongest performer in the peer group as the market has responded to clear trading outperformance by re-rating SThree through the year. On the flip side, the more cyclical peers have seen a de-rating as share prices have waited for earnings upgrades to catch up. The historic PE discount for SThree has now largely disappeared suggesting a more profound re-assessment of the SThree equity story is taking place
Another period of strong trading has yielded a further earnings upgrade. Investment decisions by customers have become increasingly proactive as customers turn their attention to growth initiatives rather than the defensive measures enforced during the past 12-18 months. There is a heightened deman
SThree, Wincanton, 1Spatial, Babcock, First Group, Ascential, Dianomi, SMID Market Highlights
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SThree, Wincanton, 1Spatial, Babcock, First Group, Ascential, Dianomi, Market Highlights
Our estimates were cautiously set, but Q3 net fee income momentum at SThree has accelerated well beyond expectations, up 29% y-o-y. The contractor order book is strong (+41%) and SThree looks set to be the first in our coverage universe to breach pre-COVID peak PBT levels. We increase FY21E PBT by 20% and continue to see the risk to forecasts to be on the upside. SThree remains our top pick in the sector. TP raised from 580p to 650p. Buy.
An unequivocally strong Q3. Today’s statement reads well with Group NFI +29% yoy to £91.0m; whilst Q3/20 was an ‘easy comp’, the fact that NFI grew 11% vs. Q3/19 stood out. Today’s result also marks the second consecutive quarter of fee growth with Germany / US / Netherlands (SThree’s top 3 markets) all up vs. FY19 comps, and with good momentum moving into Q4. Echoing the trend seen across the wider space (e.g. RWA.L, here), Perm (+36%) outperformed Contract (+27%), with the Contract order book +41%. Encouragingly, given the Group’s STEM focus, Tech / Life Sciences saw the strongest growth (+33% / +30% respectively). Net cash was up 6% QoQ to c.£51m. Upgrades. FY21 PBT is now expected to be “significantly above market consensus” (£51.4m company-complied). We note however that this is driven primarily by the full impact of planned headcount/infrastructure investment having shifted into FY22, as well as the strong Q3; the Group still expects a sequential QoQ increase in headcount in Q4, however we now model this at a lower quantum than initially anticipated. Per Fig 1, we increase FY21E PBT by c.18% (to £58.9m) on improved conversion of c.17.2% (+c.2ppts). The higher base effect flows into FY22E, however we hold conversion flat yoy at c.17.3% to account for said investment delays and working pattern normalisation. Remain at HOLD. Reflective of today’s upgrades / momentum, we increase our TP to 580p. We maintain our HOLD however; the shares have been strong YTD (+c.84% vs. peers +c.40%), resulting in a pre-statement NTM P/E of 21.3x - c.3 turns greater than past-cycle average levels (Fig 2). And whilst a premium is arguably warranted given the step-change in STEM-demand etc, at current levels, we simply see better value elsewhere. Moreover, today’s FY22E forecast changes imply a required c.4ppt conversion improvement for SThree to hit the bottom of its 21-24% target range by 2024 - no mean feat, in our view.
SThree, the specialist STEM / flexible working recruiter, continues to enjoy strong momentum. Over 3Q21 net fees were +11.0% ahead of 2019 levels, highlighting the strength of the STEM / flexible working business model. Productivity continues to move ahead (up +38% YoY) and management has announced that earnings “will be significantly above market consensus”. Consequently, we are raising our FY20 PBT forecast from £50.0m to £58.1m (+16.3% upgrade).
The previous quarterly net fee updates had shown the extent of the net fee recovery SThree has experienced so far in FY21, but the real story of the H1 results is the improving conversion ratio driven by significant productivity gains and improving business mix (ECM now 31% of contract net fees). Critically, both net fees and PBT are now tracking ahead of the FY19 comparative, which underscores the strength of the recovery. For the third time this year we are upgrading our estimates with FY21 net fees / PBT increasing by 4% /9% respectively. We would have pencilled in a stronger upgrade but for lingering concerns over Covid tail risks, contractor working day adjustments and a moderate degree of H2 productivity reversion. Looking forward, there is no doubt that the risks to estimates remain on the upside, especially looking at net fees. We are mindful that the likely headcount rebuild through H2 FY21 and H1 FY22 could impact FY 22 productivity and this is driving a smaller 4% / 5% upgrade to our FY22 net fees / PBT estimates. Year to date, SThree has materially outperformed both the peer group and the broader market and we see little to suggest that this trend will not be maintained. The valuation gap to the peer group has narrowed dramatically as SThree’s structural growth positioning and quality of earnings has clearly resonated.
H1 21E results were in line with expectations. Momentum in H2 continues to build, with the contractor order book strengthening in June and continued growth in Perm. We raise our FY21E PBT by 8%. Our estimates remain cautiously set, allowing for contractors taking holidays as we emerge out of lockdown. There will also be investment in headcount and IT. If SThree’s FY24E market share and EBIT conversion ambitions were achieved, it would provide material upside to our estimate trajectory. TP raised from 570p to 580p. Maintain Buy.
SThree, the specialist STEM / flexible working recruiter, continues to enjoy strong momentum. Interim results show ongoing expansion in consultant productivity, which is helping drive the conversion ratio (up >560 bps 1H21 vs 2H20). Meanwhile, SThree is seeing further growth in its contractor order book, resulting in increased confidence for further net fee progression. As a consequence, full year earnings are likely to exceed our recently upwardly revised forecasts and we are increasing our FY21 PBT estimate by +10.4%.
Trading conditions in SThree's main markets continue to improve and leave the company well-placed to benefit from skill-shortages in key technical roles within IT, life sciences and engineering. SThree is establishing a track record of earnings upgrades which will increase confidence in the transit
We increased our forecasts on 3 June as SThree pre-announced the strength of Q2. Today’s full release shows Q2 NFI +22% y-o-y and H1 NFI +3% on H1 19. The contractor order book is up 33% and productivity +36%. We make no changes to forecasts today, but now expect H1 21 PBT of £27.4m, up 14% on H1 19. Our H2 estimates are cautiously set, reflecting more normalised contractor working hours and selective headcount investment. We see the risks to be on the upside. Maintain Buy.
SThree, the specialist STEM flexible working recruiter, continues to enjoy good momentum. The 2Q21 trading update show net fees up +8% vs 2Q19 and up +17.6% vs 1Q21. Crucially, we are seeing progress across all key territories. Given the current momentum being delivered we see further progress in the share price and reiterate our BUY recommendation and 535p target price.
SThree has maintained its strong recovery momentum through H1 2021. The unscheduled trading update confirmed short term term trading is ahead of expectations across the majority of the group portfolio. Geographically, Germany, the US and Netherlands have continued to trade well. The combination of positive net fee momentum and a tightly controlled cost base that has yet to see a sharp increase in headcount, means profit expectations have increased. H2 risks notwithstanding, we are upgrading our PBT estimates for the current year by +15% and for FY22E by +7%. The scheduled Q2 trading update is due later this month and this will provide more detail on the geographical spread of performance
SThree has issued an early Q2 update as a result of better than expected trading. No numbers have been given at this stage, with a full update due on 14 June. However, management expects FY21E PBT to be materially ahead of consensus and we increase our forecast by 15% to £46m. We think that the performance has been strong across the quarter, both in terms of productivity and net fee income growth (sequentially and vs. FY19). We raise our TP from 500p to 575p. SThree remains our top pick in the sector.
SThree, the specialist STEM flexible working recruiter, continues to enjoy good momentum. Ahead of its planned Q2 trading update (scheduled for 14 June), the company has released a surprise RNS, confirming that trading "has been stronger than expected" and that FY21 profits are now expected to be ahead of previous forecasts. Consequently, we are raising our FY21 PBT estimate from £39.4m to £45.3m (+15% upgrade).
SThree’s trading commentary through the second half of FY’20 had already highlighted the resilience of the business model. Yesterday’s trading update served to highlight how well positioned SThree is to exit the pandemic in good shape. Two key markets; DACH and the USA (together 60% of group net fees) have delivered positive YoY growth; ahead of expectations. Whilst +19% YoY growth in the US will capture the headlines, +3% growth in DACH is arguably more impressive given the strength of the Q1’20 comparative (+9%). All in all, SThree was able to deliver a flat YoY performance against a comparative largely undisturbed by the pandemic; laying a solid foundation for the year to come (potential FX headwinds nothwithstanding).
Q1 trading confirmed the improving trends indicated at the FY20 results. Life sciences and technology remain at the core of the improvement, disciplines that have offered greater resilience to the impact of the pandemic. We increase our estimates but believe there is scope for further positive earn
Solid performance vs. a relatively easy PY comp Today’s statement flags Q1 net fees -1% LFL (split Temp/Contract net fees c.-2% / Perm flat) to £75.5m – albeit versus a relatively easy PY comp (flat LFL) – with the results showing an encouraging continuation of sequential QoQ improvement (vs. c.-7% Q4/20). Period end heads were c.17% lower. Net cash increased c.14% QoQ to c£57m (vs. c.£50m as at Q4/20). As usual, no operating profit/margin detail was disclosed in today's update, with the outlook statement scant on detail and guidance still withdrawn – no information re the replacement for Alex Smith (outgoing CFO). Within the mix DACH (36% of Group fees) demonstrated a sequential improvement QoQ at +3% (vs. -2% Q4/20) to £27.3m – Germany, which accounts for c.92% of DACH, delivered a robust performance +3%, driven by Tech +14% and Life Sciences +7%. EMEA excl DACH (37% of Group fees) also showed QoQ improvements -14% (vs. -20% Q4/20) to £28.1m – primarily driven by a challenging performance in the UK (-17%) as a result of IR35/Covid restrictions/Brexit; however, this was partially offset by a robust performance in the Netherlands (the division’s largest individual constituent) which improved sequentially QoQ to -4% (vs. -15% Q4/20). Importantly, the USA (the world’s largest STEM market / 24% of Group fees) demonstrated a strong performance +19% to £18.3m – improving QoQ (vs. +11% Q4/20) – largely driven by strong growth in Life Sciences (+25%) and Tech (+43%). APAC (2% of Group fees) also showed a notable sequential QoQ improvement to c.-14% (vs. -30% Q4/20 – vs. a soft comp) – impacted by Japan, however the Group notes encouraging underlying new deal activity towards to the end of Q1. TP / Recommendation / Forecasts unchanged In light of today's results, we elect to keep our forecasts / recommendation / TP unchanged (we increased our FY21E Adj. PBT by c11% at the time of the FY20 results). The shares have enjoyed a solid run of late (c.+19% 3M) and given that our current TP implies a NTM EV/NFI of c1.2x (in-line with long-run average levels), we believe the shares are fully valued at 330p and hence, barring a significant step-change in conversion/fee growth (akin to the Group’s ambitious 2024 strategy, in our view), we see minimal scope for outperformance near-term.
SThree has delivered Q1 ahead of expectations, with reported NFI up 1% y-o-y and back to pre-COVID levels. Germany and the US are the star performers, but all regions are improving. The contractor order book is back in growth territory, up 1% in Q1 after -9% in Q4. Productivity is improving strongly which bodes well for EBIT drop-through. We increase FY21E PBT by 5.5%, with risks on the upside. Growth prospects are excellent and the shares are cheap. Remains our top pick. TP raised from 475p to 500p.
The Q4 trading update had already flagged a better than expected net fee and profitability performance and these results have put more meat on the bone. Beyond the resilience SThree has shown in what has been an extraordinary year; the key questions looking forward are going to revolve around the maintenance / acceleration of Q4 productivity improvements and the pace of any recovery in net fees. Progress on either is likely to see further upward pressure on estimates. As it is, we are following our November upgrades with a further upgrade today to reflect the non-recurrence of certain costs in FY21. With a clearer picture now in place from the peer group; there is no doubt that SThree has significantly outperformed from a net fee perspective and profitability. SThree has come out of this crisis with their strategic commitment to STEM roles and flexible working firmly vindicated. Despite the clear water between SThree and its peers, we have yet to see a disconnect in share price performance. Despite recent strength, SThree still offers good value compared to the more volatile peer group. Cyclical recovery hopes are benefiting all the UK staffing plays, even if SThree is the only one that looks to be exiting 2020 on a substantive high.
A trading performance that was in-line with management's previously indicated top-end update highlights the gradual recovery that is emerging in recruitment markets. The contract book has stabilised, and a strong balance sheet has facilitated a return of dividends. On our preferred EV/Net fees metr
Screen of the Week - Furlough, SThree, Ricardo, Superdry, Boohoo, Shanta Gold, SMID Market Highlights
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Screen of the Week - Furlough, SThree, Ricardo, Superdry, AstraZeneca, Boohoo, Shanta Gold, Market Highlights
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SThree has delivered FY20 PBT in line with expectations and returned to paying a dividend. There is no update on current trade, but we expect the positive momentum to continue. We raise our FY21E PBT by 6.5% to account for restructuring and impairment costs taken in FY20 that will not recur. Management is steadfast in its strategy and market share ambitions, with the model having navigated the pandemic far better than peers. A 10.1x, CY21E EV/EBIT is cheap. TP raised from 450p to 475p. SThree remains our top pick.
25 - 29 January 2021
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Today’s scheduled Q4 trading update provides a fuller net fee performance picture, following the November update that prompted material upgrades to consensus forecasts for FY’20. The key headline is one of good resilience across much of the group and two areas of notable strength in the US and Germany. The US stands out in terms of delivering positive net fee growth (+2%) against such a challenging backdrop.
On the back of improving NFI trends and strong productivity gains in Q4, SThree is set to deliver FY20E PBT in line with the guidance given at the 23 November update, when we increased our forecast by 16% to £28m (including c. £2m of Australia losses). The business is well positioned for FY21E and we expect the market to start to refocus on longer term ambitions as we move out of crisis management mode. SThree remains our top pick amongst the recruiters trading on just 5.6x FY19 peak EBIT. Buy.
SThree has released a brief update ahead of the scheduled Q4 trading update expected on 12th December. The key headline is that an improving trading backdrop over the last few months has driven a better than expected profit performance. Market consensus was clearly too light with the company now guiding for an FY’20 outcome above the top end of the range of expectations. We have updated our forecasts accordingly and now look for FY’20 PBT and EPS of £28.1m / 13.3p respectively – a PBT upgrade of +53% on our previous estimate. Although the company has not formally reinstated full guidance, we are taking this opportunity to publish our estimates for FY’21. SThree has shown good resilience through this pandemic. The combination of STEM industry specialism and the inherently higher short term visibility of the contract focus has afforded SThree management a greater degree of flexibility when it came to aligning the necessary cost actions with the strategic ambitions of building market share in the key, global STEM markets. Costs and headcount have been cut, but they have been targeted and selective. The net result has been an increasingly positive tone in trading commentary, culminating in yesterday’s explicit upgrade. Has this been fully priced in by the market? To an extent yes, with the shares now standing +57% above the May 2020 lows and outperforming the peer group year to date. However, despite this outperformance (share price and operational) SThree still stands at a material valuation discount to its peers. We continue to find the extent of this valuation gap hard to justify.
SThree has issued a brief, unscheduled update as a result of stronger than expected trading in October and November. Management now expects FY20E PBT to be ahead of the top end of the consensus range. Reflecting this, we increase our FY20E PBT by 16%. SThree remains our top pick among the professional recruiters, reflecting its strong, defensible position in the STEM and flexible working markets. We raise our TP from 420p to 450p. Buy.
Net fees ahead of expectations Group net fees -14% LfL YoY to £75.7m (split Temp/Contract net fees -12%/Perm -20%) with management flagging that trading was above expectations despite the YoY reduction. Per BBG, consensus FY20 net fees is c£294m (INVe £292.7m), implying c£67.0m of fees are required in Q4/20 (Q4 is historically an important trading period for the Group). Sequentially, the Group period end headcount is -9% versus Q2/20. Net cash increased c26% QoQ to c£39m (versus c£31m as at H1/20) and the statement flags that the Group still has a ‘substantial working capital position to unwind’ – we have flagged this as a potential cause for concern previously given the macro. Dividends still ‘under active review’. Within the mix DACH -9% to £25.8m (of which c90% is Germany; Germany represents c30% of overall Group net fees), versus a prior year comp of +8% and stable QoQ (Q2/20 -9% LFL) – with the main drivers being Life Sciences and Germany which were off c1% and 10% respectively. EMEA excl DACH -22% to £27.5m (the largest constituent is the Netherlands at c16% of Group net fees), versus a relatively easy prior year comp of -2% and marking a deceleration versus Q2/20 (17%) – the main driver being the Netherlands, in particular its Technology business which had a ‘challenging period’. Unsurprisingly, the UK (c10.5% of Group net fees and EMEA’s second largest region) demonstrated a continuation of its downward trend (-19% Q2/20) and was the Group’s weakest region out of the Group’s Top 5 countries, declining -28% in the quarter to £7.9m versus a prior year comp of -8%. This was mainly as a consequence of continued Covid-19 lockdown pressures, looming Brexit-induced market volatility and the anticipation of private sector IR35 contractor reforms due in early-2021. Despite a resilient performance in Q2/20 (-2%), the USA (the world’s largest STEM market) declined -3% to £19.6m in Q3 and versus a prior year comp of +5%, unsurprising given that the region was ‘behind-the-curve’ in terms of infection rates at the time of the Q2/20 results. Forecasts/TP/recommendation under review Despite the Group trading ‘ahead of expectations’, given the lack of guidance in today’s trading update re FY20 net fees, we elect to place our forecasts/TP and recommendation under review pending further colour at today’s analyst briefing (08:30am).
An encouraging Q3, with improving sequential contract order book trends, combined with a better H2 drop-through rate drives a 22% increase to FY21E EBIT. Cash management remains strong and the company has repaid UK furlough money, paving the way for a return to dividends in due course. SThree remains our top pick amongst the recruiters, given its differentiated business model. A CY21E EV/EBIT of 8.6x and 4.7x peak FY19 EBIT is cheap. TP raised from 385p to 420p. Buy.
SThree’s H1 results have provided more colour on the net fee performance already announced to the market at the Q2 update earlier in June. With the rest of the peer group now reporting their quarter to June trading; the extent of SThree’s net fee outperformance is now clear to see. SThree’s May quarter saw a 12% YoY decline, compared to a mid-30s average for the peers in their quarter to June. Even factoring for the one month disparity still suggests a materially better SThree net fee outcome. As we have discussed in previous research, this net fee outperformance does not come as a surprise. Unlike its peers, SThree is a specialist business whose underlying growth drivers (STEM specialism and flexible working focus), if anything, have been amplified by the current crisis. SThree also enjoys leading positions in a number of key markets outside the UK and has undoubtedly benefited in market share terms. The flip side is the operating leverage impact from investments made over the last year. Heading into this crisis, SThree had been growing headcount in line with its strategic objectives. Tough cost actions have been taken in response to Covid-19 but it is also clear these strategic growth objectives have not been sacrificed. The hit to short term profitability should be set against strong cash-flow performance and a significantly de-risked balance sheet; laying the foundations for recovery in FY21 and beyond.
SThree has delivered a resilient H1 performance with no surprises in the numbers. No details on current trade have been given, but we assume that the business is on track. As flagged at the Q2 update, we expect Q3 to be tougher. Nonetheless, we increase our bottom of the range FY20E EBIT estimate by 14% to what we think is still a cautiously set level. The balance sheet is solid and can withstand worst case scenarios. Strategic investment has been maintained to drive market share and defensible, longer-term growth. TP raised from 340p to 385p. Maintain Buy.
SThree’s H1 update has underlined, in equal measure, both the extent of the Coronavirus impacts but also the resilience of the SThree business model. In headline terms net fees were solid in Q1 and came under material pressure in Q2. However, our sense is that the 12% YoY decline in Q2 was better than the market would have been expecting. Impacts varied considerably across the group, which also underlines the geographical breadth of the business and the localised effects within the STEM niches that SThree serves. It is clear SThree has responded to the pandemic in a nuanced and differentiated fashion. Despite headcount reductions (-5% Q2 vs Q1) we do not see a “slash and burn” approach that has typified others. Heading into the crisis, SThree had been in strategic growth and investment mode in response to structural drivers (STEM and flexible working) that remain very much in place. Management response to the crisis has been to protect the business whilst not sacrificing these growth opportunities. The resilience of the business model can also seen through the growing strength of the balance sheet as a result of specific management action but also the natural working capital release of the contract business model. Net cash of £31m and £136m of total available liquidity positions SThree securely for the second half.
Q2 net fees -12% LFL H1/20 Group net fees -7% LFL versus a tough PY comp (+9% LFL). With Q1/20 fees already reported flat, today’s statement confirms a significantly weaker trading performance in Q2 (Mar-May inclusive) with COVID impacting most of the Group’s trading regions; Group net fees were down 12% LFL in Q2. Within the mix, DACH (c33% of Group) declined 9% LFL in Q2, driven by a weak performance in Technology and Life Sciences. EMEA ex DACH (c38% of Group) fees were down 17% LFL in Q2, with the Netherlands (the largest country in that region) declining 12% LFL, with the Group also seeing “challenging conditions” in the UK (UK NFI -19% in Q2). The US held up better than the Group’s European and APAC trading regions (Q2 net fees -2% LFL), however we remain cognisant of the fact that the US is ‘behind the curve’ re COVID infections/deaths; today’s reported surge in cases in our view highlights the potential for continued weakness in trading H2/20+ and we remind investors that the US represents c26% of Group net fees; the US is the world’s largest STEM recruitment market. Contract/Temp fees held up slightly better than Perm in Q2/20 (Contract/Temp -11% / Perm -17%). Headcount reduced H1/20 headcount increased c2% YoY, however this declined by c5% between Q1 and Q2 in line with the Group’s response to COVID; management confirmed a focus on “managing headcount” in their COVID update on 6th Apr. Liquidity Liquidity has improved since the Group’s last update with net cash of c£31m (c£50m RCF fully-drawn down); per today’s call, this is primarily as a consequence of a slowdown in Contract/Temp activity. Days sales outstanding reduced slightly to 42 days in Q2 (was 45 days in Q1), however we remain wary of the Group’s “substantial working capital position” – no quantum provided in today’s statement - and potential debtor recoverability issues in Q3/20+ with the economic fallout from COVID intensifying. Forecasts/TP under review, guidance remains withdrawn Importantly, the statement confirms that “the Group will see a short-term decrease in operating leverage and a resultant impact on profitability compared with last year”; FY20 P&L guidance remains withdrawn however and the statement does not give any colour on conversion/EBIT. We elect to keep our forecasts/TP under review pending additional colour at the Group’s half year results (scheduled for 20th July).
SThree delivered a much better than expected Q2 with NFI down 12% vs. our -29% estimate, reflecting the resilience of its STEM and flexible working model. The H1 drop-through of lost NFI to EBIT will be high, given continued strategic investment and we expect Q3 to be tough. Q4 is the biggest quarter of the year. Our bottom-of the range FY20E EBIT looks cautiously set, but we make no changes at this stage. The balance sheet is solid, with strong cash collection. SThree’s model of scale and focus provides defensible, long-term growth. Maintain 340p TP and Buy.
Following the Q1 trading update on 16th March, which referenced the early impacts of Covid-19, SThree has now provided a more specific update outlining immediate management actions. Heading into this crisis, SThree was very much in front-foot mode, unlike many of its peers, with 2019 having been a year of investment (headcount and capabilities). Covid-19 has bought this investment phase to a shortterm halt as the immediate focus has shifted to pro-active cost management and cash discipline. Although we would expect headline reductions in headcount, our expectation is for this to vary considerably at the local level. The key focus is on retaining as much of the capacity, skills and capability as possible in anticipation of the recovery, whilst protecting the business in the short-term.
Recoverability of ‘substantial’ working capital in focus Although today’s statement does not quantify the P&L impact on trading post outbreak, the Group has flagged that a ‘substantial’ working capital position remains outstanding – i.e. funds owed to the Group for candidate placements already undertaken. Naturally, given the fluidity of the outbreak and the impact on businesses across the globe, we expect the near-term recoverability of this balance to be particularly challenging; compounding pressure on the Group’s balance sheet given its low level of cash (c£2.4m as at 31st Mar) and fully-drawn c£50m RCF with covenants limited to (1) net debt: EBITDA ratio of 3:1 and (2) a minimum of 4:1 EBITDA: interest. Consequentially, we are encouraged by the Group’s decision to seek access to the BoE’s Covid Corporate Financing Facility to help improve liquidity. Temp recruitment likely to feel the immediate brunt of the shutdown c75% of SThree net fees are derived from Contract/Temp placements. Whilst we accept that the entire sub-sector is likely to be severely impacted by COVID-19 due to reduced client confidence driving a resultant reduction in mandates, we expect the Contract/Temp space to be most acutely impacted in the immediate-term given the lack of government support under various Job Retention Schemes. As Temporary workers are off-payroll, under the rules of the scheme in the UK (for example), they cannot be furloughed and hence, in our view, are vulnerable to contract terminations as clients look to inhibit near-term cash burn. We expect to see a similar theme play out internationally, thereby exerting downward pressure on profitability/conversion as both fees and consultant productivity decline. Dividend cancelled and ‘proactive cost base management measures’ undertaken The statement highlights that all hiring has been frozen and the Group is ‘managing it’s headcount as appropriate’; we assume this means a combination of redundancies/furloughing (where possible), although the statement provides no further detail. The dividend has been cancelled (conserving cash of c£13.5m) and all other non-essential capex/opex has also been postponed. Moreover, the Board/senior execs have taken a pay cut of c20% and FY20 bonuses have been foregone. Forecasts/TP under review The Group has withdrawn guidance on FY20 earnings and we therefore elect to place our forecasts and TP under review pending additional colour. Reiterate HOLD.
SThree reported an in-line Q1 (to Feb) just three weeks ago. A lot has changed since then and, given the impact of COVID-19, the company is withdrawing its earnings guidance. We cut FY20E EBIT by 57%, assuming a more protracted impact than previously. With various measures in place to enhance liquidity (including cancelling the FY19 final dividend), we expect the balance sheet to remain net cash in FY20E, even in a worse case scenario. The longer-term investment thesis is unchanged. SThree’s differentiated STEM/contract focus exposes it to secular growth trends. CY20E EV/EBIT 14.4x. TP cut from 400p to 270p. Maintain Buy.
Q1/20 in-line. Group fees were flat YoY with DACH (+9% LFL) the standout performer amidst wider uncertainty across Continental Europe (c70% group fees). EMEA (ex DACH) declined 6% (UK -8%) whilst APAC turned negative (-15%) after three quarters of consecutive fee growth. US fees (flat) ‘fell short of management expectations’ with Banking & Finance -38% and Technology growing at a lacklustre 3%; in our view, this is concerning given the US is the world’s largest STEM market. Group average headcount was up 5% YoY but, within the mix, SThree added heads in Germany and the US whilst reducing investment in all other regions. COVID-19 ‘potentially very significant’. As seen across the subsector, we believe the impact of the recent outbreak has the potential to materially affect recruitment firms’ fee growth and margin, particularly given this coincides with recent oil price volatility and increased concerns around global growth. And whilst we accept that Temp players tend to outperform their Perm counterparts during more protracted downturns (see our Dec-19 Thematic), SThree is not immune; we believe the impact of potential near-term hiring freezes (as a result of reduced client confidence) is likely to weigh on consultant productivity and thus we reduce FY20/21E EPS by c60% and c57% respectively. IR35 unhelpful. Last week’s Budget announcement confirmed the roll-out of private-sector IR35, with the potential for contractors to be deemed in-scope (c84% of UK fees are Contract). Notwithstanding the potential for a pick-up in UK Perm, our reduced net fee forecasts FY20/21E (overleaf) reflect the risk-off approach likely to be adopted by many of the Group’s larger clients. Working capital unwind. We model improvements in our working capital assumptions (to FY22E), reflective of an unwind of the Group’s Temp book as reduced client confidence weighs on fees. However, we assume DPS is maintained at 15.3p, driving net cash lower given the abovementioned downgrades (overleaf).
SThree’s Q1 trading performance was resilient and in itself would have led to unchanged forecasts. The company has not given any guidance, or seen any material change yet, but we expect coronavirus to have a significant impact. We show our base case quarterly net fee income assumptions as well as NFI/EBIT scenario analysis. We expect SThree’s contract model to provide more resilience than those with a perm focus and STEM skills, if anything, will come into greater demand. We cut FY20E EBIT by 29% and FY21E by 23%. We would hope for a sharper rebound. CY20E EV/EBIT 7.9x. Balance sheet is robust and the longer-term investment thesis is unchanged. TP from 480p to 400p.
Q1 in-line with expectations Q1/20 trading update (covering Dec-Feb). Group NFI flat LFL and in-line with management expectations. DACH (the strongest performer across the Group) fees grew c.9% LFL (Germany +7% LFL, which represents c.92% of the division and is driven by strong growth in Life Sciences and Tech). EMEA excl DACH -6% LFL, driven mainly by a poor performance in the UK (-8% LFL), mainly as a consequence of the soon-to-be-implemented private-sector IR35 rules (as per last week’s Budget) and Brexit-induced market volatility in December. The Netherlands (the largest constituent of EMEA) saw LFL fees +3%. The US was below market expectations (flat YoY), driven by a decline in Banking & Finance (net fees -38% LFL) and a below expectation performance in Technology and Engineering. APAC, as expected, was disappointing – LFL fees -15%, driven mainly by the impact of COVID-19 in Jan-20 and the Australian Wildfires). Net cash c.£9m as at 29th Feb. TP, recommendation and forecasts under review As seen across the wider peer group, we believe it is likely that consensus will move materially lower today in light of the recent COVID-19 outbreak and the confirmed roll-out of IR35 in the UK private sector. We therefore place our TP, forecasts and recommendation under review pending today’s results call (at 08:30).
There were few surprises in the FY19 final results as the net fee; adjusted PBT and net cash headlines had been announced at the Q4 trading update. The detail in the results confirmed that FY19 was a strong year with net fee income and profit all coming in at all-time highs. Net fee income growth of 7% (5% on a constant currency basis) YoY was also ‘best in class’ in terms of the other quoted staffing groups. This endorses SThree’s well-differentiated STEM-flexible working strategy. The overall trading backdrop half- way through SThree’s fiscal Q1 remains unchanged from Q4 and is perhaps best described as ‘subdued’. We now adjust our FY20/21 forecasts for multiple factors, the most material being the increase in sterling value (relative to other currencies) and the FY19 headcount investment. As a result, we lower our FY20/21 PBT estimates by -7%/-8% respectively. Given the phasing of the headcount investment, a higher than normal H2 profit weighting is to be expected. Further out, medium-term targets – as discussed at the recent capital markets day- reflect management's ambitions to aggressively grow market share, and drive material further improvements to group profitability as the scale benefits of a well invested global platform bear fruit. Despite a good run, the shares still trade at a 20% plus discount to listed peers.
In these five short videos Mark Dorman, SThree CEO, discusses the FY19 results, the strong cash performance, the benefits of SThree's focus on STEM, how FY20E has begun and which markets he is most optimistic about over the medium term.
FY19 profit ahead of expectations. SThree reported FY adj operating profit c3% ahead of consensus expectations (c6% ahead of INVe) at £60.0m, implying a Group conversion ratio of 17.5% on £342.4m of net fee income (pre-announced at the Q4/19 trading update mid-Dec); a c60bps YoY improvement; this is a record for the Group with strong cash conversion of c84% driving a c6% hike in the full year dividend to 15.3p. Headcount investment weighed on productivity. Headcount increased c6% YoY (majority Germany/US) - this, combined with weaker trading in the UK and Benelux (given reduced client/candidate confidence - see below), drove consultant productivity c2% lower YoY (£141.3k FY19 versus £142.5k FY18). Emphasis on H2/20. SThree’s earnings are typically split 40/60% H1/H2; however, given the aforementioned headcount investment, we expect FY20 to be skewed even greater in favour of H2 (we understand it takes c12 months for a consultant to reach Group level productivity and the majority of heads were added in H2/19). Moreover, given annualised cost savings of c£5m per annum from recent restructuring efforts, we now expect Group conversion ratios to remain at a level consistent with FY19 (c17.5%) and notch up our forecasts accordingly, albeit from a lower base. Mixed exit rate data. On the positive side, a shortage of skilled labour is expected to boost demand in Germany and the contractor book in the US remains solid. However, as shown overleaf, we reduce our NFI forecasts given the Group has flagged trading conditions FY20 YTD have ‘remained similar to Q4/19’ (where net fees decelerated QoQ in all operating segments bar the US); the outlook statement highlights the roll-out of private-sector IR35 and sustained Brexit uncertainty is likely to adversely impact domestic trading Q1/20+ and softer macro conditions will dampen the rate of growth in Benelux (c25% of Group net fees) where prior year comps are tough.
Solid FY19 earnings out this morning (y/e 30-Nov) confirming EBIT ahead of our expectations by c6% at £60.0m (ahead of BBG consensus as at last night’s close by c.3%), implying conversion of c17.5% - a c.60bps YoY improvement. The statement flags that the margin outperformance primarily derived from “international markets and from cost savings delivered as a consequence of the Group’s restructuring efforts across support functions during the year”; SThree is the only constituent of the UK recruitment peer-group that doesn’t provide a divisional split at the EBIT level, however, based on reported fee growth performance, we assume the majority of the improvement YoY occurred in the Group’s APAC and Continental Europe divisions, with the UK a continued margin drag given adverse consultant productivity in the run up to Brexit/December’s general election. Headcount increased 6% YoY. Pre-announced mid-Dec, a reminder that net fees for the year were £342.4m (+6% LFL), with the decelerating trend in Group LFL fee growth seen over the course of FY19 in-line with what what’s been reported across the sector. The outlook statement is pretty mixed; in line with what we’ve heard from the rest of the pack i.e. the UK is expected to remain soggy (month 1 for STEM is December and hence its Q1/20 is likely to be dragged down by the UK in the run-up to the election etc) - likewise for parts of Europe (eg: Benelux, France, Spain which represent c26% of Group net fees) - though the Group is seeing solid exit rate data in DACH (32% of net fees) and the US – management expect the US to return to growth in Perm in 2020 (US Perm declined 11% YoY). The read-across to Robert Walters and PageGroup is relatively limited; SThree is overweight Temp/Contract (as opposed to Perm) and is focused primarily on STEM disciplines (as opposed to white collar professional). SThree shares have enjoyed a strong run of late (+c.25% on a 12M view), and now trade on c11x FY20E PE. Nevertheless, we expect today’s announcement to be positively received. We place our forecasts, TP and recommendation under review pending additional colour from the earnings call at 0930am today.
FY19 results were in line with expectations that did not change during 2019, while peers warned. FY20E has begun with trading similar to Q4 19, implying NFI growth of c. 1%.
The reassuring Q4 trading update capped off a positive run for SThree. The share price has responded to a combination of a well-received Capital Markets Day and a post-election peer group rally. The trading commentary around Q4 and FY2019 shows a group continuing to outperform in its key international growth markets. The tone around Q4 exit momentum was cautiously optimistic; especially in Continental Europe and USA. UK & Ireland remain challenging but there is a growing sense the macro sentiment backdrop may now ease off. We discuss the Capital Markets Day in more detail in this note but the key themes revolved around the long terms structural trends that SThree has positioned itself to take advantage of; the relevance of the SThree business model (both revenue and economics) and overall growth ambitions and strategy looking forward to FY2024. Even after a strong run in the share price; SThree continues to trade at a material (25%) PE discount to the peer group. The peer group has re-rated upwards sharply despite a deteriorating EPS estimate trend. Based on current consensus; SThree is now expected to outgrow the UK peer group in FY2020.
Net fees in-line; forecasts, TP and rec unchanged. SThree’s Q4 trading update confirms FY19 net fees at £342.2m (+5% LFL), broadly in-line with market consensus per BBG; we sit c2% below consensus at £334.7m (assuming +4% LFL). Adj PBT is also confirmed in-line with consensus (we sit c3% below the mid-point at c£56m for FY19E). As usual, the statement offers no guidance on conversion ratio/margin; we await further clarification at the FY results and therefore opt to keep our FY20/21E forecasts unchanged. Accordingly, we reiterate our 360p TP (implying 9% TSR) and Hold recommendation. Continental Europe OK, UK&I tough. The decelerating trend in Group LFL fee growth is in-line with the wider sector; however, whilst we appreciate that SThree’s UK&I business is somewhat at the behest of a weak macro environment (driven largely by Brexit/today’s election), its direction of travel in the UK in Q4 (a key ‘STEM’ market) is somewhat concerning; net fees -11% LFL (Q4/18 comp of -4%) with the Group announcing internal management changes to help rectify sustained underperformance in the region which should act as a catalyst for stronger performance (notwithstanding the UK macro) near-term. Overall, UK fees were -9% in FY19. APAC & MENA was strong (+8% LFL), largely driven by an outperformance in SThree’s Japanese Perm business (a core market for other recruiters in the peer group such as Robert Walters), but at c.6% of Group net fees, it is still small in the context of the wider Group. SThree’s largest business (Continental Europe) performed solidly; +1% LFL in Q4 (against a tough comp, +20% in Q4/18), but, again, the direction of travel through the year was weak; Germany was standout performer in the region, with Benelux a drag on fee growth (the Group has cut heads here too in the quarter). Our view. SThree shares have had a strong run of late (up c.20% YTD) now trading on c.11x FY20E PE; at this level, we believe the investment case remains finely balanced and the shares are, in our view, fully-valued. As discussed in our recent initiation (here), the company is acutely geared into improvements in consultant productivity and exposure to STEM creates a defensible market positioning in tight labour markets. However, (i) an underperforming UK&I business (despite a sizeable addressable STEM market), (ii) a weak balance sheet (materially lower net cash than the wider peer group (c£11m in FY19 per today’s statement versus an average of c£60m across the sub-sector), and (iii) material exposure to Temp in high-potential markets (the Group is c75% Temp exposed) are all valid bear concerns in our view. HOLD.
Following its compelling 21 November CMD performance, SThree has delivered an in-line FY19 trading update. We maintain our underlying FY19 PBT of £59.1m, which is unchanged since the start of 2019, despite tough markets and cuts from peers.
SThree - CEO Video, NewRiver, SolGold, Novartis, Primary Healthcare Properties, The Restaurant Group, Market Highlights
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SThree - CEO Video, NewRiver, Primary Healthcare Properties, The Restaurant Group, SMID Market Highlights
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At yesterday’s Capital Markets Day, SThree’s CEO Mark Dorman discusses his initial impressions of the business since joining, the overriding focus on STEM markets and flexible working, the geographies that SThree are prioritising, the ambitions for the next five years and the key takeaways from the CMD.
We came away from SThree's CMD yesterday with a sense that management has a very clear vision of how to address what is a large market opportunity. There is increased discipline and analytical rigour in decision making on the deployment of resource.
The Q3 trading update was consistent with previous updates and results. SThree continues to perform well in its key growth markets and niche verticals. Net fees were up 6% despite tough comps. As in previous commentaries, management were right to flag macro concerns even though the business has yet to show any signs of material weakness. The key message we took away was that overall expectations for the full year remain unchanged. The subsequent SThree share price outperformance suggests the market may be listening. The Capital Markets Day will be on 21st November. This will provide new CEO, Mark Dorman, the opportunity to outline clearly the direction of travel. We also see the CMD giving a deeper dive into the clear structural growth opportunities and SThree’s less visible assets. We recently spent time at the Glasgow Centre of Excellence and came away seeing Glasgow as far more impactful and front foot than a pure cost cutting exercise. Critically, we believe SThree has a powerful case to make around the fundamental economics of its business model and how this differentiates SThree from its more transactional peers.
Despite a challenging backdrop the group has delivered 6% growth in net fees (days adjusted) in 3Q19, with the contract business up an impressive 9% on the same basis, and FY19 expectations retained. This momentum reflects the group’s exposure to structural growth within STEM markets – a dynamic which we believe places it in a relatively strong position to not only outperform its peers during periods of macro uncertainty, but also capitalise on long term trends within the professional recruitment space.
AMRYT PHARMA PLC— a biopharmaceutical company focused on developing and delivering innovative new treatments to help improve the lives of patients with rare or orphan diseases have raised $60m before expenses and will relist on the AIM Market on the 25/09/2019
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The H1 results were well flagged post the Q2 trading update but they served to give a reassuring update on the current trading outlook as well as providing the new CEO, Mark Dorman, with a further opportunity to outline his take on the STEM opportunity and how SThree is likely to evolve to best capture that opportunity. Here we see a growing focus on strategic decision making and capital allocation discipline. The November capital markets day will provide an opportunity for this to be laid out in detail. SThree continues to perform well, delivering the best net fees growth in the peer group coupled with good margin expansion as the benefits of the Glasgow relocation flow through. Given macro concerns that are now weighing on the Perm heavy peer group; all eyes were on the outlook and here the tone was cautious but reassuring. Full year expectations remain unchanged with current trading solid. Clearly, management are sensitive to the macro headwinds that have been in place for some time now, although these have yet to materialise in the trading performance. The 29% PE discount to the peer group remains anomalous in our eyes.
Leisure In Depth, GetBusy, SThree CEO Video, Sirius Minerals, Joules, Motorpoint, SMID Market Highlights
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In these five short videos Mark Dorman discusses SThree's latest results with a focus on his first impressions as the new CEO, the key market drivers, investment in headcount and outlook for the group.
Sthree, B&M, SMID Market Highlights
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Sthree, B&M, Market Highlights
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Results in line, strong relative positioning
The H1 pre-close update saw positive Q1 trading momentum carry through into Q2. This performance has been delivered despite uncertain macro data. Encouragingly, SThree remarked ‘expectations for the full year remain unchanged’. Group H1 net fees + 9% YoY, is a creditable outcome, reflecting a consistent performance across Q1 / Q2. We are leaving our headline FY PBT/EPS forecasts unchanged, although we have made some minor changes to our regional mix. We would also highlight the improving balance sheet position, with net debt down to £8m (£12m at Q2). The update was also the first opportunity for investors to hear from new CEO, Mark Dorman, who joined SThree in March. Major shifts in strategy are unlikely in our view, as SThree’s unique combination of STEM and Contract focus continue to hold it in good stead. Although SThree is some way off its 52 week highs, it is now also some way off its lows, suggesting the more extreme cyclical concerns have now been priced in. Dividend growth remains a positive catalyst. SThree continues to trade at a material discount to the Staffing peer group (FY19E PE of 9.1x, 5.1% yield) despite keeping pace with its more cyclical peers.
With growth in Continental Europe and the US continuing to exceed our expectations, underlying gross profit growth of 9% in 2Q19 was marginally better than we had hoped. Whilst the UK performance was weaker, the strength in the group's core STEM markets suggests that the outlook for FY19 remains encouraging.
With growth in Continental Europe continuing to exceed our expectations, underlying gross profit growth of 9% in 1Q19 was marginally better than we had hoped. Whilst the UK performance was weaker, the strength in the group's core STEM markets suggests that the outlook for FY19 remains encouraging.
The final results did not contain any surprises but did provide more colour around the trading outlook. The strong exit momentum was confirmed; especially in key overseas markets, which helps to underpin H1 visibility. However, despite positive momentum heading into 2019, SThree is having to contest with poor macro data coming out of the Eurozone, and Germany in particular. Past experience suggests SThree’s unique combination of STEM and Contract focus should hold it in relative good stead. SThree has been subject to a Bull/Bear tug of war since the start of Q4 2018. Although SThree is still some way off its recent highs, it is now also some way off its lows, suggesting the more extreme cyclical concerns have now been priced in. The return of SThree to dividend growth is also a positive catalyst. SThree continues to trade at a material discount to the Staffing peer group (FY19E PE of 9.4x, 5% yield) despite strong operational performance and late cycle attractions.
Following a positive pre-close update in December, SThree delivered full year results in line with market expectations with Group NFI up 12% to £321.1m on revenue up 13% at £1,258.2m. NFI margin fell slightly from 25.8% to 25.5% due to higher growth in contract (+14%) than perm (+6%).
SThree CEO Video, Novartis, Domino's Pizza Group, Science in Sport, Market Highlights
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SThree CEO Video, Domino's Pizza Group, Science in Sport, SMID Market Highlights
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In these five short videos SThree CEO, Gary Elden reviews the FY18 results and looks ahead to 2019 with a focus on STEM markets in relation to economic uncertainties, any visible weakness in SThree key markets, the 2019 headcount, the increase in the ordinary dividend and what's the outlook for the business in the coming year.
The key highlight from the FY18 results is the 4% increase in the ordinary dividend – the first increase since FY11. In addition to reflecting a strong set of FY18 results, this points to a positive outlook for the group and acts as a reminder of the cash generative nature of its contract book and the structural opportunities in the STEM markets in which it operates.
In amongst the gloom, the SThree Q4 trading update was a reassuring piece of good news with the company flagging a strong end to FY18 and an outcome above the top end of expectations. The departure of the CEO, Gary Elden, was a surprise but on the flip side; new leadership will create new opportunities for a group with considerable global reach, scale and management depth. So where is the valuation now, following a poor month for cyclical equities in general? On our revised estimates, SThree now trades on a FY18 PE of 9.5x, falling to 8.6x for FY19E. The dividend yield is 5.1%, covered more than 2.0x. Based on market consensus, SThree trades at a 24% PE discount to the immediate peer group. Given the positive trading commentary and the strong start to FY19E, any potential bad news looks more than baked into the share price.
SThree plc (STHR.L, 274p/£358m) Q4 trading update to 30.11.18 (14.12.18)
Although the announced departure of CEO Gary Elden is s surprise, it comes at a time when momentum in the business is strong and the strategic shift undertaken during his six year tenure is paying off. This is evidenced by the 12% growth in underlying gross profit during 4Q18, driven by strong momentum in both the US and EU businesses.
A cursory glance at the share price chart and the peer group valuation discount might suggest the wheels have come off the SThree story. The reality is much more interesting. Instead we find a specialist STEM business; with leading positions in specialist markets (mostly overseas with better growth prospects than the UK); focused on growing a Contract business displaying highly attractive and resilient economics. Investors concentrating on superficial comparisons with very different UK peers will undoubtedly find their higher ratings more comforting. SThree requires more thought. Before recent price falls, SThree had been performing well off the back of positive trading commentary, H1 results and earnings upgrades. In our mind, not much has changed. SThree is well positioned to outperform its more generalist peers due to late cycle positioning and resilient characteristics. Near term growth prospects are good and the dividend is at an inflection point. All to be had at a PE of 9.9x, a near 30% PE discount to its peers and a 5.1% yield.
With continued momentum in the US and EU businesses, underlying gross profit growth of 13% in 3Q18 was ahead of our expectations. With an encouraging outlook for both these regions, combined with the potential for a sequential improvement in the UK, the company is well positioned going into 4Q18.
The key highlight from the 1H18 results was that the momentum delivered by the business has continued into the first weeks of 2H18. Although too early to drive material forecast upgrades, we take the opportunity to increase our FY18 EBIT estimate by 2%.
With growth in Continental Europe and the US exceeding our expectations, underlying gross profit growth of 13% in 2Q18 was materially better than we had hoped. With the outlook for these businesses remaining strong, and signs that the UK may have reached a point of inflection, we believe that the company is well positioned to deliver attractive growth in FY18.
With growth in Continental Europe continuing to exceed our expectations, underlying gross profit growth of 8% in 1Q18 was marginally better than we had hoped. Whilst the US performance was marginally weaker than expected, the strength in market fundamentals is expected to ensure momentum in 2Q and beyond improves.
In these six short videos SThree’s CEO, Gary Elden, discusses the company’s key FY17 highlights, its response to uncertainties in the UK market, investment in innovation, support staff relocation, FY18 headcount, and growth in the US and Continental Europe.
The key highlight from the FY17 results was that the momentum delivered by the business in 4Q17 has continued into the first weeks of FY18. Although too early to drive material forecasts, this combined with historic investment should leave the company well-placed in FY18.
With continued momentum in the US and EU businesses, underlying gross profit growth of 8% in 4Q17 was ahead of our expectations. With an encouraging outlook for both these regions, and signs that the UK may have reached a point of inflection, the company is well positioned going into FY18.
SThree plc (STHR.L,363p/£472m) Proposed relocation of UK Support Functions (01.11.17) | Servoca plc (SVCA.L,23p/£28.3m) Trading update and appointment of new CFO (03.11.17) | World Careers Network plc (WOR.L, 227p/£17.3m) Full year results to 31 July 2017 (02.11.17)
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The company has announced the proposed relocation of its UK based support staff in FY18. Whilst this move will result in exceptional costs of £13m, a pay-back of less than three years would appear to support the decision.
With continued momentum in the US and EU businesses, underlying gross profit growth of 5% in 3Q17 was ahead of our expectations. With an encouraging outlook for both these regions, and signs that the UK may have reached a point of inflection, the company is well positioned going into 4Q17.
We believe the market will react positively to the better than expected 1H17 results and the associated upgrades. We also see SThree as being well placed to weather the current uncertainties. In particular we highlight its exposures to higher growth markets and the more resilient contract business.
With momentum in the US business building faster than expected, underlying gross profit growth of 4% in 2Q17 was ahead of our forecasts. With an encouraging outlook for both the US and Continental Europe in 2H17, it would appear that the risks to our FY17 estimates lie firmly to the upside.
With the US business performing better than expected, gross profit in 1Q17 was ahead of our expectations. As a result we believe the risk to our FY17 estimates lie to the upside.
We believe the market will react positively to the better than expected FY16 profitability and the associated upgrades to FY17. We also see SThree as being better placed that its peers to weather the current uncertainties.
With the management stabilising the US business faster than anticipated, gross profit in 4Q16 was ahead of our expectations. As a result, we are increasing our FY16 PBT estimate by 5%, and expect the company to deliver broadly stable earnings y/y.
The headwinds facing the company in both the UK and US meant that 3Q16 was always going to be a tricky quarter. As a result the 2% decline in gross profit shouldn’t come as a significant surprise to the market. Instead we would see the continued strength in the group’s contract business, especially in Continental Europe, as encouraging.
The interim results held few surprises. In terms of the outlook, management have indicated that it is too early to estimate the impact of the EU referendum. We believe SThree is better placed that its peers to weather any uncertainties.
Despite a weaker than expected performance in the permanent business and the US, 1H16 gross profit was broadly in line with our expectations. This result reflects the continued strength of Continental Europe, where gross profit was up 18% y/y.
The sequential improvement in profitability across all regions and disciplines is the key positive from the trading update. Central to this is the performance of Continental Europe, where gross profit is up 20% y/y due to strong growth in the contract business and a 25% increase in permanent productivity. As a result we are confident that continued growth here and in the US, should be able to offset the slowdown in UK permanent flagged by both SThree and its peers. On unchanged numbers we expect it to deliver 14% EPS growth in FY16, which along with a 4.8% yield and 62% upside to our 470p TP leads us to reiterate our BUY rating.
StemCells has reached a critical juncture in its development program with a highly encouraging interim analysis of its Phase II PATHWAY study pointing to promising efficacy in cohort 1 of its human central nervous system stem cells (HuCNS-SC) in lead indication spinal cord injury (SCI). Given limited financial resources, StemCells is realigning operations to focus efforts on the internal funding for key pivotal Phase III SCI trials. New group leadership by way of a recently announced change in CEO comes on the heels of the current company reorganization.
We see SThree’s caution on its outlook statement as unsurprising given the macro. However, the strength in its contract book and US operations should support growth expectations for FY16. Top line growth, combined with improving cost control, gives us confidence to upgrade our FY16 EPS estimates by 6%. Combined with a stable outlook for FCF generation, we now see scope for higher cash returns from FY17. An attractive and rising yield, along with an increased target price of 470p leads us to reiterate our BUY recommendation.
Delivery of in line FY15 gross profit is a positive given the recent weakness in Energy markets. Whilst risks remain for further weakness in that market, the robust contract runner growth delivered should be sufficient to support FY16E EPS growth of 14%. This along with the encouraging movement into a net cash position, makes the current 4.3% DPS yield look all the more attractive. With 40% upside to our unchanged PT of 460p we reiterate our BUY recommendation.
The Q3 trading update from SThree is ahead of expectations and we upgrade our forecasts accordingly for both the current year and next. Stronger than anticipated growth across a number of different disciplines in both US and European markets suggests good momentum into Q4 and further potential upside despite headwinds from FX and continued weak Energy markets. Restructuring costs in H2 mask the underlying upgrade in 2015, but the outlook remains positive and we reiterate our BUY recommendation and 460p target price.
StemCells has announced transplantation of the first patient in a recently initiated Phase II trial, evaluating its human central nervous system stem cells (HuCNS-SC) as a treatment for dry age-related macular degeneration (AMD). Progression into the Phase II RADIANT trial was supported by the top-line results of its Phase I/II dose-ranging trial in dry AMD announced in June. Additionally, the company began dosing the first cohort in its Phase II PATHWAY study in cervical spinal cord injuries (CSI) earlier this year. At a price of $0.41, the shares offer considerable potential, currently trading significantly below our risk-adjusted fair value of $1.82 per share.
First half results are slightly better than expected despite weakness from Energy markets and FX headwind, with good progress in a number of disciplines and an increasingly well balanced geographic portfolio. There remains good momentum into the seasonally stronger second half of the year, and we expect further improvements in productivity and market penetration. No change to forecasts given FX headwinds, and maintain a Buy rating.
StemCells is steadily progressing its pipeline of proprietary human central nervous system stem cells (HuCNS-SC), focusing on CNS disorders. Trials in its two lead indications, spinal cord injuries (SCI) and dry age-related macular degeneration (AMD) are now migrating from early and encouraging dose finding and initial efficacy to larger Phase II studies powered for proof of concept. Early findings are expected to begin feeding through in the current year. We believe StemCells' shares offer considerable value on a current price of $0.74, well below our risk-adjusted fair value calculation of $1.95 per share. Additionally, the company has recently filled its coffers with a successful share offering.
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