Recruiters: where do they see themselves in five years?

“London Work. Kate: Urgent employment.” The job emails pop into my inbox every day, every hour. I’ve been invited to apply — online — to be a crime scene assistant, a cleaner and a library assistant, among others, presumably generated by an algorithm because I just qualify as a baby boomer and once admitted to watching a crime scene drama. 

I bin the emails. However, they illustrate just how hot the job market has become. They are also symptomatic of big changes in the recruitment industry as a result of demographics, changing working patterns since the start of the pandemic and advances in technology. Initial interviews by Zoom and online vetting are normal nowadays.

These shifts have worked particularly well for a handful of UK quoted recruiters, such as Hays, PageGroup, SThree and Robert Walters, which employ thousands of “consultants” to match clients and candidates across the world. They blossomed in the aftermath of Covid amid record rates of employment and the huge volume of job hires. 

In essence, “it has been a candidates’ market,” says Nick Kirk, chief executive of PageGroup. Jobseekers have insisted on higher pay and more flexibility, employers have been quick to agree to secure workers and fill vacancies, so agents have profited in the middle.

That is largely true, too, for manual workers, says Albert Ellis, chief executive of Aim-quoted Staffline, which supplies truck drivers and shelf stackers on temporary contracts to the likes of Tesco.

The circle has been noticeably virtuous for the UK’s biggest diversified white-collar recruiters, such as PageGroup and Hays, able to spend millions on automation, improving their databases and IT systems, digital record keeping and using AI to boost consultant efficiency and leverage hit rates into higher profitability. 

But the market now seems to be turning. Companies are opting to hire temporary staff rather than permanent ones and thinking twice before shelling out huge golden hellos. Last month, Robert Walters, which earns about 70 per cent of its fees from permanent placements, warned net fee income for the second quarter to June fell about a tenth. The shares fell 14 per cent. Investec cited “the gearing effect of reduced consultant productivity” and halved its pre-tax profit forecast for 2023 to £25mn. 

This month Hays reported fees in the same quarter dropped 7 per cent. Full-year operating profits would be about £196mn against £210mn last year, it said. Its shares are down about 17 per cent this year.

Analysts expect PageGroup’s pre-tax profits could fall a third in 2023 to about £134mn and its shares are off 6 per cent so far this year. 

“Good candidates still get multiple offers,” maintains Kirk. 

But there are clear signs that confidence is eroding as central banks respond to rising wages and inflation concerns. Candidates, mindful of the principle “last in and first out”, are staying put, say headhunters. Where in the first quarter, interviewees might brush off one in five proposals put forward by a consultant, now it is one in three, says Kirk. Profitability is coming under pressure.

“We have started to see things slow down,” admits Toby Fowlston, chief executive of Robert Walters. Nonetheless, he adds “markets will return as they always do.” 

The market understands there is a war for talent and the increasing role of the recruitment industry long term, but this is a very cyclical industry

Longer-term trends operating in the sector’s favour are inescapable, say recruitment bosses. And they are probably right. Those workers who quit full-time work during the pandemic in what some call “the great resignation” was not a passing phase. It has led to record lows in unemployment from Turin to Tunbridge Wells. “In Tokyo there are 1.3 jobs for every citizen,” says Fowlston. 

Over the next seven years, says Timo Lehne, chief executive of SThree, 2mn to 3mn baby boomers will leave the UK workforce and will not be replaced. There are already huge gaps in skills, particularly in science, technology, engineering and maths (Stem). That will only widen, says SThree, which focuses on Stem jobs. 

“The market understands there is a war for talent and the increasing role of the recruitment industry long-term, but this is a very cyclical industry,” points out Kean Marden, analyst at Jefferies.

The immediate dilemma for recruiters is how far to cut costs — of which staff is by far the largest — to protect shareholders’ returns. Investors penalised Robert Walters last month for seeming less agile than rivals in trimming headcount. Fowlston, though, is adamant “we must hold the line and not cut into muscle. When the market returns, it returns fast.” 

It is worth bearing in mind that in the previous economic cycle between peak 2008 and peak 2019, organic revenues of the recruiters grew, before acquisitions, between 25 and 40 per cent, according to Marden. And Robert Walters, which is more exposed to cyclical sectors such as accountancy and financial services, rebounded faster than the rest, making the biggest market share gains in the first stages of economic recovery following the financial crisis.

If Robert Walters seems too unpredictable a punt, there is the bigger and more diversified Hays. There is a lot to be said, too, for SThree’s focus on Stem sectors and it looks a tad cheaper than peers on a price-earnings multiple for 2023 of about 10 times.

Hays is trading nearer 12 times earnings, which reflects the more even split between permanent and temporary placement income than either PageGroup, Robert Walters or SThree. It has less riding on Asia than PageGroup, has built a greater exposure to more lucrative markets such as Germany and shifted away from recession-sensitive sectors such as construction towards more resilient areas such as technology and engineering since the financial crisis of 2008. 

But there is value in all of these companies, which are cash generative, debt-free and dividend paying and prices have fallen a long way. Marden reckons the sector’s enterprise value is about 1.3 times net fees, against a historic range of between 1.5 times at troughs and three times at highs. 

Following the recruiters’ progress over the next year or so may be as satisfying as watching a crime scene soap opera unfold.