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SThree Plc

Standing out from the crowd

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.

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24 Jul 20
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SThree Plc

Down, but by no means out

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.

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24 Jun 20
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Next Fifteen Communications Group Plc

FY20 final results – The calm before the storm

Next Fifteen’s FY20 final results did not contain any material surprises, following the detailed trading update in March. Headline revenue growth was 11% and adjusted PBT grew 10%. Beneath the surface; we saw a small decline in organic revenue growth (well flagged) more than offset by positive contributions from recent acquisitions. Critically, Next Fifteen exited FY20 with a strong balance sheet (net debt less than 0.2x EBITDA) and significant financial headroom (we estimate c.£35m). Next Fifteen did not shy away from the severity of the current crisis, even as far as to give an indication of the potential organic revenue impacts (-5%.to -25%) for the two thirds of the group most likely to be exposed. The key point here being that at least one third of the group will be largely unaffected and the effects elsewhere will vary considerably by agency specialisation and client industry exposure. After factoring acquisition contributions and cost reduction measures, we believe this will translate into a flat revenue performance in FY21 and a 5% decline in YoY adj. PBT. All things considered, this feels like a solid outcome from a business differentiated by the quality and positioning of its client base.

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04 May 20
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SThree Plc

Short-term action; growth ambition undimmed

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.

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14 Apr 20
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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 Plc

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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