Harvey Nash Group - Gathering Momentum

http://www.harveynash.com

It is not often that there is a share I am interested in that is trading towards the top of its share price chart, yet Harvey Nash Group (LSE:HVN) provides this. Harvey Nash is a professional recruitment consultancy firm that is listed on the Main Market of the London Stock Exchange. The company was admitted to trading in April 1997 and saw highs over 800p/share just before the turn of the millennium, but this was short lived with the stock having settled into a ~25p - 100p trading range since. Following the release of some fairly solid results today, the company's share price stands at 75.5p capitalising the company at just over £55m.


Following the release of the company's results today (that I will address later), the share actually retraced by around 5%. This is likely due to the ~16% run that the shares enjoyed before today - to a certain extent, today's results were priced into the shares considering that the strong nature of the results was outlined in an earlier trading statement. The relative strength index has fallen significantly from the 80 level to just above 60 which is very positive as it allows for upward movement in coming days as people jump in on the opportunity that has been presented following profit taking. As shown, the shares are travelling upwards in a sustainable trend. It is very unlikely that the rising lower trendline will be breached especially considering a raft of broker upgrades and the positive nature of the results. It is not inconceivable for the shares to actually break through the top trendline on momentum alone. The technical position for the company (on a medium term time frame) is bullish.

The shareholder structure of the company is such that there are relatively few shares that private investors can obtain. The company has 73.5m shares in issue and approximately 50 million of these are held by a variety of institutions. The company's directors also hold just below 6 million between them so there is a strong backing from the board which is normally good to see. The founder of the business, Thomas Crawford owns around £3.5m worth of shares with CEO Albert Ellis the next largest holder with ~£500k worth of shares. Further to this, Harvey Nash runs a share incentive program so there is a large number of Directors Shareholding RNSs that go through - these trades are generally only for a few hundred shares but are issued very regularly. Seeing as this scheme is optional, it is also positive to see continual investment into shares by the board. Even with a significant proportion of the shares not being in the public's hands, liquidity has increased over the last two years.

Courtesy of Harvey Nash Group's Website
The company has three core focuses entitled: Executive Leadership & Search, Professional Recruitment and Outsourcing. Each year the company sources and matches thousands of people to both short-term interim and permanent jobs. With the job market undoubtedly becoming ever more competitive, Harvey Nash has benefited extensively from their business model. The following description of the firm is as per Harvey Nash's website:

"Established in 1988, Harvey Nash has supported many of the world's leading organisations to recruit, source and manage the highly skilled talent they need to succeed in an increasingly competitive and technology driven world.

With 4,000 professionals in 40 offices across the USA, Europe and Asia the Group has the reach and resources of a global organisation, whilst fostering a culture of innovation and agility that empowers its people to respond to constantly changing client needs. We work with clients, both large and small, to deliver a portfolio of services: executive search, professional recruitment and outsourcing."

Aside from the business itself, what is attractive is the financial results that the company has been delivering. The trading update (prior to today's selection of interesting RNSs) was released in February. In November 2012, the group did actually upgrade its results forecasts, and impressively, they continued this streak in February by stating that the final results would likely be slightly ahead of market expectations. The company noted within the statement that favourable market conditions including employers currently needing interim job placements and preferring the flexibility that these arrangements bring. Combined with the "continued demand for oursourcing" the company benefited from these trends. Furthermore, the company's operations were supported by an increased market share in their some of their core markets (UK & Ireland) and reiterated that new operating hubs had been progressed in Asia. Following on from this, key points from their final results released today are listed below:

- Revenue up 12% to £594.7m (Revenue rose 21% in the UK & Ireland and 20% in the US)
- Gross Profit rose 6% to £83m
- Adjusted profit before tax (excluding non-recurring costs) rose 2% to £8.7m
- Pre-tax profits fell 7% to £7.9m due to one-off costs associated with an acquisition and the relocation of the group's London headquarters
- Relocation will save circa £0.9m/annum
- Earnings per share fell 6% to 7.49p
- Final dividend up 10% to 1.795p (2.92p for the full year)
- Net cash stable at £5.0m
- £9.4m of the £52.4m banking facilities had been drawn
courtesy of freedigitalphotos.net

CEO Albert Ellis commented:  "I am delighted to report another excellent set of financial results for the year, which have exceeded expectations. As one of Europe's leading technology recruitment companies, we have focused on supporting our clients' investment in new digital and mobile growth strategies by helping them find talent in these areas, in which there is an acute skills shortage.

We have also continued to benefit from making market share gains, particularly in the UK and Europe, whilst capitalising on our unique capability to help our clients reduce costs through our market leading outsourcing facility in Vietnam."


Taking into account the far from ideal market conditions, where unemployment levels remain subdued with business confidence still low, the results are impressive. When taking into account the potential for the market to improve significantly, then it is likely that Harvey Nash could flourish - the company has a £50m+ funding facility arranged by the Royal Bank of Scotland such that any market trend changes can quickly be capitalised upon. Aside from the developed markets, their increased exposure to the Asian markets could continue to bear fruit in coming years. The results give the company a PE multiple of just 10 which appears low on both an independent and comparative basis with other similar firms.

Admittedly though, there was a cautious outlook to the results, with the performance for the first half of the year supposedly reflecting this. However, the board believes that the second half of the year performance will exceed that of the first half thereby meaning that full-year results will be in line with current market expectations. This point is worth considering, but a series of broker notes today reflect the positive overall nature of the results and the undervalued state of the shares. Numis Securities reiterated its Buy rating with a 90p initial target, Shore Capital restated its Buy rating and Panmure Gordon upgraded their target price to 99p from 66p. Ultimately though, based on the chart and fundamental positions, it would not be unreasonable to see a further test of 100p before year end, which would equate to a circa 33% rise from  the current position.

Two other interesting pieces of news were released this morning. The first of these referred to Harvey Nash taking a 15% stake in a planned Vietnamese offshore call-centre business. Other partners for the project include Nikkei listed Mitsui and a subsidiary of WPP (LSE:WPP). The other significant piece of news noted that Harvey Nash had taken up their option to purchase the remaining share of Norwegian firm Bjerke & Luther AS for £1.3m. "The strength of the Norwegian economy is an added benefit to the Group's diversification strategy and we look forward to further growth from the business in the future."

Perhaps Harvey Nash's biggest attraction is that the management has demonstrated that they are capable of creating value for shareholders for over half a decade now. The financial position of the company is strong (with the recently increased banking facilities), the business is still growing and the shares are somewhat undervalued. Although risks (as outlined in the final results - a potentially disappointing H1 2013) do exist, the shares do look to offer a steady investment. Even if the company is able to meet revenues as generated for the FY 2012, profits will likely be stable in a worst case scenario when factoring out the one-off costs experienced in 2012. As mentioned, a PE ratio of just 10 and a current dividend yield of ~3.87% does not do the company justice. An upturn in their core markets could generate unexpected upside.

UPDATE (25/03/14) - I haved moved Harvey Nash Group (LSE:HVN) from Buy to No Rating after the recruiter has experienced a strong share price run up in recent months. The shares now stand at 118.0p which equates to a 56.3% profit. Adding back a total of 3.03p in dividends, that profit riases to 60.3%, which is shown on the review results page. The shares now trade on a much fairer PE ratio and whilst it is still valued at less than the peer group, it remains vulnerable to dropping off slightly given the sharp run up. Taking profits at the current level makes sense

6 comments:

  1. Sounds good and ironic as I was looking at their results this morning over some breakfast

    Might have a little dabble

    CraigJ

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  2. Great review. thanks for the effort!!

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  3. Will pick some up this morning, thank you

    Fred Kolawski

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  4. Further drop today but have my pay packet coming in so will pick up some tomorrow

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  5. interesting company

    ReplyDelete