Investing In AI And Expanding Into Japan Will Drive Future Success

Key Takeaways

• Emphasis on operational efficiencies and strategic investments are poised to improve margins and profitability by reducing costs and enhancing productivity.
  
• Expansions in Japan and high-margin service areas offer significant growth opportunities, potentially boosting revenue and earnings.
  
• Prolonged global hiring challenges and dependency on key markets may strain revenue growth and profitability until significant market improvements occur.

Catalysts

Provides professional recruitment consultancy services worldwide.

• Robert Walters is focused on driving a higher-margin business by implementing operational efficiencies such as structural cost savings through disciplined entrepreneurialism. This is likely to improve net margins by reducing operating costs significantly.
  
• The company is investing in technology and processes to enhance fee earner productivity, including the rollout of the Zenith CRM system and leveraging AI to free up employee time. This can potentially increase revenue as productivity improvements can lead to higher placement volumes.
  
• There is significant growth potential in Japan, with an emphasis on expanding the temp business and capitalizing on demographically driven skill shortages. This expansion could significantly boost revenue in that geographic region.
  
• Robert Walters is investing in high-margin growth areas such as interim management, workforce consultancy, and talent advisory. These service lines offer above group average margins, which can enhance overall earnings growth and profitability.
  
• Strategic office optimization and a focus on procurement efficiency are expected to deliver structural cost savings, contributing to improved net margins and operating profit in the medium to long term.

Robert Walters Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Robert Walters's revenue will decrease by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.7% today to 2.7% in 3 years time.
• Analysts expect earnings to reach £20.3 million (and earnings per share of £0.3) by about March 2028, up from £-6.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, up from -25.7x today. This future PE is lower than the current PE for the GB Professional Services industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.1%, as per the Simply Wall St company report.

Robert Walters Future Earnings Per Share Growth

Risks

• Global hiring markets have been challenging for two consecutive years, with subdued client and candidate confidence, reducing specialist recruitment fees and impacting revenue.
  
• A 14% reduction in net fee income year-on-year indicates difficulties in maintaining revenue growth, impacting overall earnings.
  
• Operating profit was heavily impacted due to reduced top-line trading, resulting in a breakeven position at the profit before tax level, impacting net margins and overall profitability.
  
• The uncertainty of market improvement not expected until the latter part of 2025 suggests continued pressure on revenue and earnings in the near term.
  
• Dependencies on certain markets, such as the U.K. and financial services, where end market improvements might take time, could prolong challenges in fee income and pressure overall financial performance.

Valuation

• The analysts have a consensus price target of £3.775 for Robert Walters based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £4.5, and the most bearish reporting a price target of just £2.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £758.4 million, earnings will come to £20.3 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 8.1%.
• Given the current share price of £2.35, the analyst price target of £3.78 is 37.7% 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.