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SThree Plc

FY 2019 final results – Continued out-performance

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.

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06 Feb 20
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Next Fifteen Communications Group

Full year trading update – Moving parts

The trading update for the year ended Jan 2020, did not contain any new news as such. Both Beyond and Archetype had been well flagged to the market as likely net detractors to the group in the current year. However, it is clear that the initial client losses at Beyond have not been recovered enough by new client wins to protect the group bottom line and we are adjusting our estimates accordingly. Despite this negative, the rest of the group is performing well with a blended organic revenue growth of c.10% outside of Beyond and Archetype. The outlook statement is broadly positive, Beyond notwithstanding, with 2020 expected to be a year of growth and strategic progress. Even after factoring a small reduction to FY 2020 and FY 2021 estimates, we still see Next Fifteen delivering 11% PBT growth in FY 2020 and 15% in FY 2021. The calendarised FY 2021 PE is 13.1x, a 16% discount to the slower growing and more highly geared peer group.

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29 Jan 20
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SThree Plc

Q4 trading update – Resilient model, outperforming

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.

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18 Dec 19
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Next Fifteen Communications Group

Interim results in-line – Health acquisition, estimates unchanged

The NFC rating has come under pressure due to a combination of macro concerns and a 1% organic revenue decline just reported for H1 FY2109. The organic decline is largely driven by two of the seventeen portfolio businesses with organic growth elsewhere in the portfolio improving from previous data points. We expect the issues at Beyond to correct through H2 which, combined with healthy organic growth elsewhere in the portfolio and a full contribution from Health Unlimited, leads us to upgrade our FY 2020 expectations. NFC now trades at a PE discount to both the Agency and Small Cap Media peer groups despite a superior growth profile. The balance sheet remains comfortable.

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14 Oct 19
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SThree Plc

Q3 trading update – Is the message finally landing?

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.

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30 Sep 19
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SThree Plc

H1 2019 results – Expectations unchanged

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.

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30 Jul 19
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