HSBC upgrades recruiters on likely inflation boost

21st Nov 2016 10:23

(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.Europe-listed Adecco was upped to €73 from €51 and Randstad to €53 from €36.