Temp And Contracting Expansion Will Drive A Powerful Earnings Recovery Ahead

Catalysts

About Hays

Hays is a global specialist recruitment group focused on higher skilled Temp, Contracting and Permanent roles for blue chip, government and mid-market clients.

What are the underlying business or industry changes driving this perspective?

• Scaling Temp and Contracting, now 62 percent of group net fees and growing strongly in several focus countries, should accelerate revenue growth and smooth earnings as hiring patterns shift toward flexible labour models.
• Rapid expansion of Enterprise Solutions, with 8 percent net fee growth, a doubling of average deal size and a win rate improving from one in five to one in three, positions Hays to capture structurally larger, multi-country contracts that can materially lift net fees and operating profit.
• Sector leading 5 percent improvement in consultant net fee productivity, seven consecutive quarters of underlying gains, and targeted redeployment into higher skilled, higher paid roles create meaningful operating leverage that can expand margins as volumes normalise.
• Structural cost savings of 65 million pounds per year already secured, with a further 45 million pounds targeted by FY 2029, materially lowers the breakeven point so that any cyclical recovery in fees is likely to drop through disproportionately to operating profit and earnings.
• Significant technology, data and AI investment, supported by higher ongoing Capex and cloud migration, should enhance automation, pricing and matching accuracy, boosting consultant productivity, net fee growth and ultimately net margins as the platform scales.

Assumptions

This narrative explores a more optimistic perspective on Hays compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Hays's revenue will grow by 5.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -0.1% today to 1.6% in 3 years time.
• The bullish analysts expect earnings to reach £127.9 million (and earnings per share of £0.09) by about December 2028, up from £-7.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £83.8 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 15.8x on those 2028 earnings, up from -110.6x today. This future PE is lower than the current PE for the GB Professional Services industry at 18.8x.
• The bullish analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.05%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged and unusually deep recruitment downturn, already in its third year with group like-for-like net fees down 11 percent and Perm fees down 17 percent, could signal a structurally weaker demand environment for recruitment services rather than a normal cycle. This could cap long-term revenue growth and limit any recovery in earnings.
• Secular shifts in candidate and employer behavior, including weaker wage inflation, persistent preference for remote or flexible work and greater hesitancy to switch jobs, may structurally depress Perm placement volumes. This could slow mix improvement and keep group net margins and earnings below prior peaks for an extended period.
• Heavy reliance on structural cost reduction and ongoing restructuring programs, targeting a cumulative 80 million pounds per year of savings and requiring continued exceptional charges, increases execution and disruption risk across multiple regions and back office functions. This could dilute service quality, constrain growth investment and pressure operating margins and earnings if benefits are delayed or underrealized.
• Strategic concentration in Temp and Contracting, now 62 percent of group net fees, and in large Enterprise clients with longer payment terms, exposes Hays to customers with strong bargaining power and cyclical volume cuts. This could compress underlying Temp margins, raise working capital needs and restrain free cash flow and net profit even if reported revenues stabilize.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Hays is £1.0, which represents up to two standard deviations above the consensus price target of £0.72. This valuation is based on what can be assumed as the expectations of Hays's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.0, and the most bearish reporting a price target of just £0.5.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be £7.8 billion, earnings will come to £127.9 million, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of £0.54, the analyst price target of £1.0 is 46.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.