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Jul 29, 2014

'Sick man' France offers healthier outlook for staffing firms

Unemployment, labour law supports part-time hiring
By Sudip Kar-Gupta
    
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LONDON (Reuters) — Despite high unemployment, weak economic growth and complex labour laws, France is offering an unlikely glimmer of hope to beaten-down staff recruitment firms such as Adecco and Randstad.

The euro zone's second-biggest economy has been a mixed blessing for recruiters in recent years. French labour laws and work contracts make it costly to hire and fire employees, increasing the attractiveness of temporary staffing, but overall demand for labour has suffered during the tepid recovery.

However, a recent upswing in demand for industrial workers as the car market rebounds may signal a change in fortune, with analysts pointing to pockets of activity in temporary staffing — despite investors' perceptions that France remains the "sick man of Europe".

A government tax credit designed to stimulate employment also looks likely to help.

"While France is still not doing very well (overall), the temporary jobs market seems to be recovering," said Jos Versteeg, senior equity analyst at Theodoor Gilissen.

As a result, analysts are looking again at Swiss-based Adecco, the world's largest staffing company, and Dutch group Randstad, for both of which France is an important market.

KBC Securities raised its rating on Randstad to "buy" from "hold" this week, saying its prospects were slowly improving.

Adecco is on track to deliver its highest annual EBITA (earnings before interest, tax and amortization) margin this year since before the financial crisis, Jefferies estimates.

Both companies' shares have risen in the past two weeks, although they remain down for the year.

France is already the biggest market by revenue for Adecco and the second-biggest for Randstad. It is also important for their U.S. rival Manpower, which reported higher second-quarter revenues in France last week but said its performance in there had nevertheless been sluggish.

In recent years, Randstad and Adecco have suffered as a result of France's record high unemployment of close to 3.4 million — the jobless rate is above 10 per cent of the workforce — and both have closed branches.

As firms cut costs, temporary staff are the first to go, partly due to the rigid labour laws, but this inflexibility can also translate into good business for the recruiters when things start to pick up.

Between 2000 and 2012, official intentions to hire permanent staff grew four per cent, lower than a 14 per cent rise for temporary placements and a 76 per cent surge for short-term contracts, French Labor Ministry data shows.

A factor in the brightening outlook is the "CICE" government tax credit. Launched in 2013 and sweetened this year, it effectively cuts payroll taxes on the salaries of employees that are at or just above the minimum wage, and the subsidy goes straight on to the bottom line of staffing firms.

Some analysts see it helping the recruitment companies for years to come. "The current scheme runs through 2016. But France is full of subsidies, so there is a good chance it will be extended thereafter," said Theodoor Gilissen's Versteeg.

Some investors remain cautious, with French business activity still shrinking in July, although more slowly than before.

"It's an interesting theme, as the interim staffing business is usually a leading indicator on economic recovery," said Frederic Rozier, fund manager at Meeschaert in Paris.

"However, we haven't yet seen a significant impact of the French job tax credit on the results of staffing companies, and now with doubts rising again on the outlook for economic growth in Europe and elsewhere, it might be too early to buy these stocks," he added.

Shares of French-focused recruiter Synergie, whose market value is much smaller than Adecco or Randstad's $9-$14 billion, are up 30 per cent since the start of the year.

Valuation

According to Thomson Reuters StarMine's "SmartEstimate", which favours top-rated analysts, Randstad's earnings per share are expected to grow 21.9 per cent over the next 12 months, while those of Adecco are forecast to be up 18.4 per cent over the period.

Adecco trades at a forward price-to-earnings ratio of 13.44 and Randstad at 12.74. Both are lower than a median of 17.87 for a basket of eight staffing stocks including Michael Page and Hays, which are more exposed to a swifter economic recovery in Britain.

In May, Adecco said CICE had contributed to a 230-basis-point increase in its French margins in the first quarter, while Randstad said in April that the subsidy had similarly lifted its first-quarter French margins by 200 basis points.

In addition to margin protection, Yasmina Barin, an analyst at Swiss bank SYZ, said gradual recovery in the industrial sector would also likely help revenue.

"We expect solid sales development for Adecco," said Barin. "It should benefit from some inflection in France, supported by improving trends in cyclical sectors such as industrials."

    
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