Tapping into the jobs market – are SEEK and recruitment companies worth a look?

Financial journalist
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Pre-GFC, recruitment was an industry that grabbed a lot of attention on the share market, when Talent 2, Ross Human Directions (the former Julia Ross Recruitment) and Skilled Group were high-flying mid-cap stocks.

Talent 2, listed in 2004, was the “second coming” vehicle of Andrew Banks and Gary Morgan, who had listed their Morgan & Banks business in 1994, before selling it to global competitor TMP Worldwide in 1999. In particular, Banks and Julia Ross were high-profile evangelists for the recruitment business, and colourful company leaders got plenty of attention in a roaring market.

But the jobs market took a hit with the GFC – particularly the high-end financial jobs – and the shine came off the mini-sector.

Banks and Morgan took Talent 2 off the stock market in August 2012 after it fell into net loss and the share price fell 80% in 12 months – and 90% from its peak, achieved in August 2007. Ross Human Directions was taken over by rival recruitment and HR outsourcing company Chandler Macleod Group in January 2011, after its share price had more than halved from its peak.

While not a recruiter, Skilled Group – which provides temporary and contract labour to the industrial, technical and professional sectors of the economy, and also has an engineering and marine services business – also opened-up investment exposure to the employment market; as did SEEK, the job website operator.

This pair, and Chandler Macleod, represent the pick of the jobs market investments. Each has its attributes, and its challenges.

SEEK looks fully priced

SEEK, listed in 2005, has proven the ability of internet-based businesses to play havoc with traditional business models, most notably in stealing Fairfax’s job advertising business from under its nose. SEEK predicted that advertisers and jobseekers would each migrate to the medium with the largest audience, and bore that proposition out. More recently, SEEK has developed its business by partnering with education and training providers, leveraging its Australian market dominance and the strength of its brand name from employment classifieds, as well as investing in online employment websites in other markets, most notably the fast-growing Asian and Latin American regions.

While SEEK certainly took Fairfax out of the job ads business, it did not want to dis-intermediate the industry: it has always worked with recruitment companies. Ironically, SEEK now finds that its major challenge comes from someone who wants to cut its lunch, just as it did Fairfax: the online professional network LinkedIn, the business model of which is built around companies going straight to LinkedIn to view the individual profiles people have posted.

SEEK has been a good investment, returning about 16% a year over the past five years, with a steep recovery over the last 12 months, up about 46%, well out-pacing the market. It certainly qualifies as a growth stock, priced on about 20 times expected earnings: still only about 60% of job ads in Australia go online, compared to 80%-plus in the USA, and the stock is being re-rated upward on the back of the potential in its international business, particularly in China. But investors – particularly SMSFs – can’t have everything. SEEK is not a yield stock, priced at a 2.5% fully franked yield for FY14. That doesn’t cut the mustard for an SMSF.

Skilled for yield?

Skilled Group has also emerged from a difficult labour market, returning about 34% a year over the past three years. The company has lifted its interest in its offshore marine services business, tapping into the strong oil and gas market in Western Australia. In the core labour provision business, Skilled’s situation mirrors much of corporate Australia – revenue growth difficult to eke out, but cost reductions and improved efficiency generating margin growth. The company has made a big bet on the resources market – about 58% of revenue now comes from this area – and expected improvement in the general employment market should add to profit growth.

On a yield perspective, Skilled also looks the goods. The consensus of analysts’ forecasts has the stock paying a dividend of 16.1 cents a share this financial year and 18.1 cents in FY14. At $3.43, that places Skilled on a fully franked yield of 4.7% this year and 5.3% in FY14. For a SMSF in accumulation mode, the equivalent yields are 5.7% and 6.4%. In pension mode, that becomes 6.7% (FY13) and 7.6% (FY14). That is an attractive prospect.

Chandler Macleod looks the pick

Lastly, it’s worth looking at Chandler Macleod, which is the best of the listed recruiters by far in terms of profitability – in that it is profitable, and pays a fully franked dividend. But even Chandler Macleod is not strictly a recruiter: it is more a human resources (HR) services provider and corporate consultant, and is progressively reducing its reliance on volatile permanent recruitment revenue, and growing the higher-margin managed services and specialist products business – human resource outsourcing, IT outsourcing, business process outsourcing, training services. One of Chandler Macleod’s main focuses in this area is its Aurion payroll technology.

Chandler Macleod is a good, resilient business that had a sound half-year to December 2012, with revenue up 3.9% to $802 million, net profit down 32% to $5.5 million – but underlying earnings (EBITDA) up 13% to $22.5 million – and interim dividend up 17% to 1.4 cents, fully franked.

While chief executive Cameron Judson spoke for much of corporate Australia when he said at the profit release, “We don’t see any immediate signs of improved business confidence,” the main attraction of Chandler Macleod is that a high proportion of its cost base is fixed, giving it good operating leverage to an improving employment market.

Last year, Chandler Macleod paid a second-half dividend of 1.6 cents a share. I’m working without analysts’ estimates here, but even if there were no lift to the final dividend, with 1.4 cents banked, three cents in total for FY13 would give you a fully franked yield of 5.08%, at a share price of 59 cents. For an SMSF in accumulation phase, that makes an equivalent yield of 6.2%; in pension mode, that payment would equate to 7.2%. Small-capitalisation stocks (Chandler Macleod is valued at $275 million) carry added risk, but if you want exposure to the employment market, that kind of yield is definitely an SMSF proposition.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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