Tap into the turnaround at Harvey Nash

BUY

05/07/2010 Richard Hemming

Albert Ellis, Harvey Nash’s CEO, is bullish that the IT recruiter’s fortunes are now turning around and that it will achieve the 20 per cent growth in earnings that house broker Numis forecasts for the current financial year.

Having cut significant costs, the company is beginning to hear positive noises from clients, and given its strong recent dividend history, is a turnaround well worth backing.

‘I am quietly confident – definitely not too worried,’ said Ellis following a recent trading update from Harvey Nash, ‘I am more positive than indicated from the management statement.’ Released in mid-June, Harvey Nash’s interim management statement said that while management was happy with the improving demand the group is experiencing from employers for its recruitment services, ‘the strength of the recovery remains uncertain, particularly in the Eurozone, and the risks to economic growth remain’.

Revenue for the three months to April was 4 per cent below the first quarter last year, with gross profit 6 per cent down. However, the reason that investors should cheer is that a turnaround in the group’s fortunes is occurring.

Gross profit was actually 6 per cent up on the previous quarter to the end of January and profit before tax was similar to the same period a year ago, supported by vigorous cost cutting actions.

Despite evidence of improving fortunes, no-one can blame a recruiter for being cautious in this environment, with dark clouds hanging over large economies in southern Europe, namely the notorious PIGS (Portugal, Italy, Greece and Spain). After all, economic growth is the lifeblood of these companies, which rely on job creation. But other factors that underpin Ellis’s optimism also need to be considered.

Firstly, Harvey Nash is exposed to a relatively robust IT services sector in the UK and Europe. The UK represents 41 per cent of its earnings and it has little exposure to the public sector, where the most vicious jobs cuts are expected to take place.

Secondly, a CBI survey (sponsored by Harvey Nash) released in May of more than 650 largely private sector employers, with a total of three million staff, emphasised that economic activity in the private sector is picking up. Only 16 per cent of these employers plan to suspend wage rises at their next review, compared with 55 per cent a year ago.

In Europe, which accounts for 45 per cent of Harvey Nash’s gross profit, the company has very little exposure to the south and, following an acquisition in Norway last year, is the number one recruitment consultant in the Nordic region. The remaining 14 per cent of profits come from the US.

Another positive is that the recent noises emanating from Harvey Nash’s clients have been upbeat. In late April, management announced the signing of additional services with global telecommunications provider Alcatel-Lucent worth £36 million over five years. Harvey Nash’s existing contract with Alcatel is worth £12 million per annum and is up for renewal later this year.

Besides its improving new business momentum, Harvey Nash has a robust track record when it comes to dividends. Even in the troubled year to January 2010, when profit before tax declined 57 per cent, the company actually raised its dividend by 10 per cent.

Numis forecasts that dividends will continue to increase by 5 per cent and 4 per cent respectively for the next two years, meaning that Harvey Nash offers investors a forecast yield of over 5.3 per cent.

Even with profit before tax forecast to climb 20 per cent and 12 per cent in the next two years, PBT will still be well below its £9.5 million 2009 level. Numis is forecasting pre-tax profits of £4.9 million for the 12 months to January 2011, ahead of £5.5 million the following year. Trading on a forward p/e of ten times, an undeserved discount to peers, the shares are worth buying if you don’t believe the world is going to the dogs.

Tags: Deals & contracts, Full list, Turnaround

Sector: Support Services

Companies: Harvey Nash Group

Tap into the turnaround at Harvey Nash

Spread Trading. New from Halifax Share Dealing

Institutional Investors in AIM 2011 - New Report

Coverage of AIM, techMARK and PLUS Markets

Share recommendations and small-cap stock picks

Latest Recommendations

Homeserve 08/02/2012

Low & Bonar 07/02/2012

Avon Rubber 02/02/2012

Free Stock Recommendations

Sign up today

Tap into the turnaround at Harvey Nash

Subscribe today

Spread Trading. New from Halifax Share Dealing

Institutional Investors in AIM 2011 - New Report

Coverage of AIM, techMARK and PLUS Markets

Share recommendations and small-cap stock picks

Popular Recommendations

Latest Recommendations

Homeserve 08/02/2012

Low & Bonar 07/02/2012

Avon Rubber 02/02/2012

Sectors