Friday, 5 December 2008

Weak final quarter fails to dampen SThree’s year

(By Anthony Miller) UK-based, but increasingly international recruitment firm, SThree, signalled an ‘in-line’ year (to 30th Nov.) in its FY trading update today (see here). However, to some extent echoing Michael Page’s comments yesterday (see here), CEO Russell Clements warned that a weakening final quarter portended the toughest year they have faced for some time. However, he made the point that SThree saw the German market “in rude health” and has not seen the “everything down everywhere” slump that has befallen Michael Page.

We can’t’ really call SThree a UK ITSA (IT staff agency) any more as 45% of gross profit comes from outside the UK and nearly a quarter from non-IT recruitment. This diversification has proven a very smart strategy as it is their UK (predominantly IT) businesses that have been hit hardest in the recent downturn. Indeed, Q4 UK permanent placements fell 29% yoy while non-UK ‘permies’ rose 29%. Similarly, UK contactor placements fell a more modest 7% while non-UK ‘temps’ rose 22%. Fee rates rose again in Q4, helped in Europe by weak sterling, but even UK IT fee rates were up a tad, which is quite an achievement.

SThree really does stand out among the crowd with its multi-brand go-to-market and aversion to playing in the commoditised ‘preferred supplier agreement’ (PSA) game, especially with IT vendors. Its mid-market, contingent supply focus helps insulate it from the procurement mentality that larger corporations inflict on their traditional ITSA’s, typically resulting in ‘requests’ for across-the-board fee rate cuts on already wafer thin margins. SThree has seen this behaviour in its banking sector clients (no surprises there), some of whom have asked for 10% fee rate cuts, but say they have passed the pain almost entirely down to the contractors, so protecting margins.

I asked Russell Clements which IT skills are still hot, and, guess what, it’s still SAP and enterprise products, as well as risk, audit and security.

Having said all that, SThree’s shares have suffered much in line with other UK-based ITSAs, down over 40% ytd, better than Harvey Nash (-50%) and Spring Group (-55%) but more than Michael Page’s -30% fall.

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