Broker snap: Hays divides opinions

9th Jul 2009 12:12

After its chief executive Alistair Cox said in an interview with the FT this week that he saw no end to the "brutal job market", the market was braced for terrible figures from recruitment firm Hays and was not disappointed, though opinions differ on where the company goes from here. Singer Capital Markets rates the shares a "buy", though the fact that the stock's prospective dividend yield has risen above 7% suggests the market is sceptical about the group's ability to maintain the divi.Though Singer's earnings projections indicate that the full year 2010 dividend will not be covered by earnings, and the 2011 divi barely covered, the broker believes that a cut in the pay out can be avoided during the downturn. "Firstly, the dividend is covered by FCF [free cash flow] in FY'09E (1.6x) and FY'10E (1.0x); secondly, the balance sheet is not distressed," the broker argues. "Given the modest size of the interim dividend, the August 2010 board meeting is likely to be the key point at which the payout is assessed. In our view, the meeting will take place against a backdrop of sequential recovery in net fee growth," Singer said. Charles Stanley is more ambivalent about Hays's prospects and has a "hold" recommendation on the shares. "In terms of valuation, with little visibility it is difficult to make firm forecasts so valuing Hays on an EV [enterprise value]/Sales ratio of 0.5x gives a tentative price target. On this basis, with potential sales of under £2bn in 2010, the market value looks broadly about right," the broker believes."The good news in today's update is the balance sheet though it was widely expected to remain strong in this first year of the downturn. In addition, the management team has focussed on cash flow in order to support a sustainable dividend policy.," notes Charles Stanley analyst Tony Shepard.Completing the range of views Panmure Gordon is a seller. "This Q4 update is consistent with our current expectations, and we leave our forecasts unchanged, suggesting a P/E of just over 10x rising to over 14x for 2010. We believe this suggests a recovery in markets is expected in the near future, which in our opinion couldn't be further from the truth," the broker stated.