Hydrogen Group – all set for lift off

Recent recessionary pressure has severely impacted the profitability of many a company in the recruitment sector, where so much hinges on the availability of a steady stream of jobs in which to place candidates. And with the number of vacancies in the public and private sectors, in the UK particularly, expected to shrink in the years ahead, the outlook for many sector players is bleak at best.

With this in mind, investors prepared to place their chips on the sector should back only those counters that are proven and profitable, with strong brands and positions in attractive niche markets. One such candidate is Hydrogen Group, the internationally diverse specialist recruiter that takes its name from the universe’s most abundant element, also used in rocket fuels.

Not only has Hydrogen, City headquartered but also with offices in Sydney and Singapore, coped with the worst of the recessionary ravages, it is set for a rocket-fuelled recovery, with confidence returning to the global recruitment market. The AIM-listed company, fronted by executive chairman Ian Temple, recently issued a confident set of interims, and its shares, strong recent performers, should have further to go.

Strategy
Hydrogen is a global specialist recruitment company focused on mid-to senior-level roles spanning the business technology and transformation, finance and accounting, legal, HR and engineering disciplines. Operating globally, Hydrogen helps clients to find candidates through its own specialist research teams located in more than
40 countries.

According to Ian Temple, at any one time Hydrogen has around 1,200 people on its books, of which between 900 and 1,000 are involved in the area of ‘business technology and change’, where the company provides those skilled professionals necessary to merge and maintain a company’s operations when a bout of downsizing, or some M&A activity, has just taken place.

He says Hydrogen looks for people that have developed specialist skills in their careers that give them the ability to make appropriate decisions during times of uncertainty. For instance, helping to decide which assets of a recently acquired company should be kept or sold, or which of the technologies belonging to two companies should be used going forwards following a merger.

Under Temple’s guidance, Hydrogen is pursuing a compelling strategy for growth, a core tenet of which is its focus on geographical expansion. Although the group mainly recruits for UK-based roles, it is growing its international footprint, having recently filled roles in places as far afield as Brazil, China and the Philippines.

Currently, Temple’s plans are focused on Hong Kong, where he says Hydrogen is in the ‘incubating’ stage of establishing and building local relationships, a process that previously proved successful in Singapore, ahead of the establishment of an office there.

Hydrogen, says Temple, intends to take its time building offices in new countries. The plan is to expand at a measured pace, opening one international office a year, because ‘we don’t want to have lots of tiny hubs everywhere – we prefer to have locations with a proper infrastructure and management team.’ Not that Hydrogen needs to hastily expand all around the globe, because it already boasts growth potential aplenty in its existing business, via teams focused on the Middle East, Germany and Benelux (Belgium, the Netherlands and Luxembourg).

Alongside forays overseas, Hydrogen is also expanding into new industry areas where it can source candidates for senior roles. One such sector is the nuclear power industry, where Hydrogen can call upon its existing expertise in filling roles in the engineering space.

Temple is particularly excited about the growth potential in nuclear, a form of energy he describes as ‘in fashion’ due
to its perceived environmental benefits. ‘Many places are building nuclear power stations at the moment,’ enthuses Temple, ‘because it is not fossil fuel driven and does not produce as many greenhouse gases.’

Apparently, one major source of talent for international jobs in the nuclear industry is South Africa, where a lot of nuclear power stations have been built recently and where Hydrogen is scouting for suitable candidates. To give an indication of the global growth scope in nuclear, Temple draws attention to plans afoot in China alone to construct 98 new nuclear power stations, while closer to home, Italy has a stated intention to develop its nuclear power capability.

Management
Ian Temple, the group’s affable executive chairman, has been a Hydrogen man since its formation in 2005, playing a key role (as CEO) in bringing the company to the London market in 2006. Prior to taking on the Hydrogen mantle, he worked as the south of England general manager for the Computer Team Group, as well as earning his sector spurs as a recruitment consultant for executive and management recruitment group PSD. These days, he acts as a member of the Institute of Chartered Accountants in England & Wales and also serves as the chairman of the Inner East London Board of the charity Young Enterprise.

Occupying the CEO hot seat since 2008 is the University of Salford-educated Tim Smeaton, co-founder of specialist recruitment agency Project Partners back in 2000. Like Temple, Smeaton’s CV also includes a spell at Computer Team Group, where he was the sales director for the south of England. Before ascending to his current position as
chief executive, he learned the ins and outs of Hydrogen’s operations via his role as chief operating officer.

Hydrogen’s finance director is the University of Nottingham-educated John Glover, who spent 20 years at energy behemoth BP in a variety of finance-related roles. Like Temple, Glover is a chartered accountant and states that his time at BP provided him not only with experience in ‘business management and control’, but also with a degree of expertise in ‘change management’.

Other notable Hydrogen board members include Ishbel Macpherson, its senior independent non-executive director, who previously headed up the UK mid-market corporate finance arm of Dresdner Kleinwort Wasserstein and also acts as an ‘NXD’ at both funeral services group Dignity and infrastructure services specialist May Gurney. Hydrogen’s other non-executive directors include Ian Fallmann, previously the Asia-Pacific-focused managing director at Bloomberg, and Martyn Phillips, currently the operations director at DIY retail giant B&Q.

Prospects
From an investor’s point of view, the fact that Hydrogen has been consistently profitable since 2006 is a major plus. Admittedly, the company did report a swing from profits of £2.8 million to a £5.46 million loss last year, in the midst of the recruitment market malaise, but even this was only after a £5.6 million goodwill write down.

Add that back and the accounts show a £300,000 profit. ‘Even in the bad years, Hydrogen has not lost money and continued to generate a lot of cash,’ says Temple, adding that in the good years, ‘we have generated more cash and even bigger profits.’

What’s more, the business has bounced back on the restoration of confidence to the global recruitment market. More
recent interim results to June, posted in September, proved highly encouraging, with Hydrogen reporting profitable growth across all of its markets and swinging from a £5.9 million loss to a £1.1 million profit, as sales surged 58 per cent higher to £55.2 million (2009: £34.9 million). And group net fee income (NFI) – the preferred recruitment sector metric – motored 67 per cent higher to £13.2 million.

Significantly, Hydrogen also showcased its reduced reliance on the uncertain UK economy, with international NFI growing by more than 200 per cent to £4.7 million to represent 35 per cent of the business, a marked increase from only 19 per cent a year earlier. Even so, in the UK, Hydrogen highlighted an improving trend across all four industries in which it operates, noting in particular a marked upturn in financial services as well as a 130 per cent uptick in business levels in the engineering sector.

In yet another welcome trend, Hydrogen highlighted a recovery in its permanent operations, where NFI surged 110 per cent higher to £7.5 million, while at the same time there was a near 70 per cent rise in the number of contractors out on assignment to more than 1,000. Most impressively, all this growth was delivered organically, owing much to the actions taken by Temple and his team last year to position Hydrogen for lift-off in more benevolent economic climes.

Hydrogen did report half-year net debt of £800,000, but this was after shelling out £800,000 in dividends and £500,000 in employee benefits, and the cash-generative company cheered by increasing its half-time dividend from 0.5p to 1.4p per share.

Valuation
For the full year, analysts at broker finnCap are forecasting a resurgence in Hydrogen’s pre-tax profits from £300,000 to £2.4 million, as turnover increases 22 per cent to £90.8 million. Then next year, investors might expect a further £500,000 surge in profits to £2.9 million, as sales burgeon again to £97 million. For 2010 and 2011 respectively, earnings per share improvement to 7p (2009: 2.4p) and 8.4p have been pencilled in.

Hydrogen’s shares, which sprang into life in the latter half of 2009, have had strong momentum behind them in the year to date, though they still trade some way below 2007 peaks north of £3. They currently swap hands for a punchy-looking 19.1 times prospective earnings, a premium to many a quoted peer trading on a single-figure multiple. While not dirt cheap, the current rating, according to finnCap analyst Mark Paddon, with a 180p price target for the shares, is anything but overcooked, since it reflects the positive momentum behind Hydrogen as well as its ‘high gearing into the cyclical recovery’.

Investors should also note that Hydrogen, with a strongly cash-generative business model, has consistently paid a dividend. Indeed, based on expectations of a maintained 4.1p payment for this year and next, the shares offer a respectable prospective yield of 3.1 per cent at current levels.

Overall, we consider that the current price represents an attractive entry point for investors, with Hydrogen poised to profit from forthcoming restructurings and M&A activity, sporting ambitious overseas growth plans and with exciting opportunities to grow in attractive niches such as nuclear sector recruitment.

What’s more, under Temple, Hydrogen has forged a corporate culture that motivates and inspires its employees. This will help play a part in the future expansion of Hydrogen’s earnings and further recovery in the share price.