Questor: The rewards outweigh the risks on this yo-yo stock

Share tip: A persistent high dividend proves markets undervalue this recruiter

Regular readers will know of this column’s penchant for looking for stocks where times look tough, sentiment is depressed and the share price chart heads from the top left of the screen to somewhere near the bottom right.
This means we do sometimes go looking for trouble quite intentionally, and then prove perfectly capable of finding it, as our recent travails with both Dowlais (DWS) and OSB suggest. Worse, we can sometimes lose our nerve and give up before the good times do indeed start to roll again, as has frustratingly happened with Coats (COA), which was our fault, not theirs. 
Equally, when the strategy works it really works and it does not take too many winners like Bellway (BWY), Just Group (JUST) or Costain (COST) to more than make up for the losers.
This takes us to our latest attempt to find a bargain in recruitment giant PageGroup.
The shares trade no higher now than they did in 2010, amid a cooling in the employment market and a series of weak updates. PageGroup, which operates across 37 countries worldwide, has even coughed up a couple of profit warnings in the past year, as it has reported five straight quarters of falling net fee income, and done so with little immediate sign of improvement in sight.
Alongside July’s trading statement, Nicholas Kirk, its chief executive, highlighted a notably weak end to the second quarter, as the number of new vacancies and job interviews tailed off. This comes amid low confidence among employers, who were therefore reluctant to hire, and employees, who perhaps preferred to stay put rather than chance their arm on a change in job in the view that if anything went wrong it could have become a case of “last in, first out”.
August’s first-half results lived down to that update, as the FTSE 250 index member reported that pre-tax income had more than halved year-on-year.
In China, the rate of decline in activity accelerated, while the UK’s continued collapse at least showed signs of stabilisation, albeit against a soft base for comparison. Permanent hires continue to be more heavily affected than temporary ones, marking negative sentiment across employers, who tend to favour full-time staff when they are confident and part-time staff when they have less visibility on the near-term future.
PageGroup itself is responding to these tougher times. A 3pc quarter-on-quarter cut in fee earner headcount took the total to 5,598, the lowest mark since the pandemic-blighted second quarter of 2021 and 12pc below the level of a year ago.
But those cost cuts may be the first part of a bull case for the shares, as they help to support profits, and Mr. Kirk felt no need to cut earnings guidance any further alongside the first-half results. Analysts still believe net profits will more than halve in 2024.
The second point in PageGroup’s favour is its balance sheet, as the company carries no debt and net liabilities are very modest indeed, even once £111m in leases are taken into account. This financial strength also means PageGroup continues to pay dividends and the 5pc-plus yield catches the eye.
The third and final argument rests with the valuation. A forward price-to-earnings ratio of more than 30 times is surely deceptive, given the depressed nature of this year’s profits. Net income forecasts of £37m for 2024 compare to recent peaks north of £100m, and a return to the prior peak would mean the forward earnings multiple looks a lot more interesting. The market seems more worried about the downside risks than any profit recovery potential but again this is where the valuation could protect the downside and provide us with upside opportunity when the good times returns (as they always do).
The last time PageGroup’s shares traded at current levels (or lower) was during 2020’s pandemic, and before that it was 2016, after the EU referendum vote. At their nadir in 2020 Page’s enterprise value (its stock market value adjusted for debt, leases and cash) represented £163,000 for every fee earner on the books, while during the recovery of 2021, as the shares peaked, that figure reached £358,000. 
Right now, each fee earner is valued at £221,000, so the downside could easily be 25pc (or more) if things get worse (and they might) but the upside could be 60pc (or more) if they get better.
Questor says: Buy
Share price at close: 368.8p
Ticker: PAGE
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