INTERVIEW: Harvey Nash Group – Valuation, Yield and Growth Attractive

Harvey Nash Group Plc (LON:HVN) are the topic of conversation with Zeus Capital’s head of Research Mike Allen. Mike provides some company background, shares his thoughts on the acquisition of Crimson Ltd, explains the assumptions made in his forecast and how the valuation looks compared to its peers.

Harvey Nash Group Plc is an international recruiter specialising in the technology sector. The group has a strong portfolio of powerful brands and operations spanning more than 40 countries. In its AGM statement in June, it announced a transformation plan aimed at streamlining the business, with £700k in savings already identified for FY18. The Group has a solid balance sheet and has utilised this morning by acquiring UK based Crimson IT, which is expected to increase PBT by >£2.0m on an annualised basis (potential for >£3.0m). The business is cash generative and offers an above average dividend yield of 5.2%, which we feel is secure given the Group’s low gearing and a cover building to 3.0x by 2019E. Harvey Nash trades at a substantial discount to other UK listed recruiters; an FY18 EV/EBITDA of 4.5x and a PER of 7.6x equates to a 45% and 37% discount versus its UK listed peer group.

  • Business model overview: Harvey Nash is an international recruitment business with operations in the UK & Ireland (38% of Group NFI), Europe (40% of Group NFI), and the USA & Asia (22% of Group NFI). The Group specialises in the technology sector, with 81% of candidates placed in this end market in FY17. It offers permanent placements (39% of NFI), contracted candidates (39% of NFI) and a range of managed services & outsource solutions (22% of NFI). This broad mix of services allows the Group to provide client solutions across the business cycle.
  • Investment case summary: The Group consists of a portfolio of market leading brands with a focus on its core technology end market. Its mix of services balances the need for contract-led earnings visibility with high margin permanent placement income. It has a strong balance sheet; attractive and secure dividend yield and the option to transact further earnings enhancing acquisitions which have the potential to transform the Group into a £17-20m EBIT business over the medium term.
  • Forecast assumptions: Our forecasts have factored in its latest acquisition, which we believe enhances 2020E EPS by 18%. We believe our assumptions are conservative, with potential for further cost savings to be delivered.
  • Valuation: The Group trades at notably lower multiples to its UK recruitment sector peer Group. An FY18 EV/EBITDA of 4.5x failing to 3.4x in FY19 represents a 45% discount. On an PER basis, the Group trades on 7.6x FY18 earnings, a 37% discount. Our blue-sky valuation assuming the Group can reach £17.5m 20.0m of EBIT implies a share price of 165-175p, a potential upside of >50% to current levels. We believe the shares offer a compelling entry point for a company with an established track record of performing across the cycle, a cash generative business model and a solid balance sheet.

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