Broker tips: European recruiters, Mitie, WS Atkins

21st Nov 2016 15:01

(ShareCast News) - HSBC upgraded staffing groups Page, Hays and SThree to 'buy' ratings as the sector is seen as a key beneficiary of impending inflation.Trading down at the low end of where they would expect to be in the cycle compared to industrial stocks, HSBC said recruiters are cheaper relative to others due to their strong cash flow and capital discipline in a slow growth environment."The current discount relative to industrials seems unwarranted. If there is inflation they may, again, prove operationally geared to increases in the value of sales," the bank said.Most economists are confident the UK will see a significant rise in inflation in coming months, while in Europe the growth is likely to be more muted.HSBC said staffers' low financial gearing and net positive cash on their balance sheets should help them sustain the current dividend levels even if inflation is minimal.Analysts said they would not recommend staffers if there was a high risk of recession in labour markets, which data does not currently imply, with labour scarcity building."The correlation of staffing stocks, to bond yields, is striking, largely we believe because wage rate inflation has a geared effect on the P&L."Growth and margin estimates were lifted for the recruitment companies in the fourth quarter and next year, which has lifted the earnings multiples for each of the stocks, with all of them moved from 'hold' to 'buy'.Page Group's target price was lifted to 440p from 385p; Hays' to 150p from 110p; and SThree to 320p from 270p.Any major collapse in MITIE´s share price would provide a longer-term opportunity, but shorter-term there were various uncertainties which needed to be resolved, Cannacord Genuity said.The company´s Facilities Management business was still attractive, and opportunities were still present for it to benefit from being the UK´s largest player in the space, alongside "significant scope" for self-help within the business.The outsourcer´s average free cash flow of £50m per year over the past decade should underpin the stock to an extent once it exits its Care unit, analysts Matthew Walker and Aynsley Lammin said in a research report sent to clients.A long-term margin of 5% also looked achievable, they said, so given that the shares were trading on an enterprise value-to-sales (ex Care) ratio of 0.5 "any major collapse in the shares does provide a longer-term opportunity".However, there remained uncertainty around trading in fiscal year 2018, new management was likely to review its future strategy in early 2017 and speculation around the company´s leverage, given the potential cash costs of exiting its Care arm, left the analysts "less positive" in the short-term.As an aside, Cannacord expected MITIE to set a full-year target of 2.1 for its earnings cover.Hence their decision to cut their target price on the shares from 270p to 195p, which was ten times´ their estimate for MITIE´s earnings per share in 2010, and to downgrade their recommendation from a 'buy' to a 'hold'.WS Atkins was under the cosh as Liberum downgraded the stock to 'hold' from 'buy' and cut the price target to 1,600p from 1,720p after the company's first-half results last week.The brokerage said first-half fully diluted earnings per share were exactly in line, with 13% EPS growth and £3.3m debt provisions above the line.However, it cut its 2018 FD EPS estimate by 4%, mostly due to the lack of US pipeline and despite FX tailwinds.It said the performance of the group's Projects, Products and Technology business was disappointing from an earnings and cash perspective.Liberum increased its net debt estimate from £1m to £39m following a weak H1 and said the target price cut reflects lower earnings expectations, a higher pension deficit and higher debt.Still, the brokerage said there are plenty of opportunities for growth across the divisions.