Questor: uncertain economic outlook creates an opportunity to buy this cyclical mid-cap

The global economic outlook has materially changed over recent months. The war in Ukraine and high inflation are just two of many factors that could dampen the world’s economic growth over the coming months.

Of course, the global economy has a solid track record of recovering from its various slowdowns, recessions and depressions. In Questor’s view, investors have no way to know when such events will occur. But they can use the threat of their occurrence to purchase shares in high‑quality businesses with solid finances while they trade at lower prices.

Such companies not only are likely to survive any short-term economic woes but have the potential to take advantage of a subsequent economic recovery.

Recruitment business Hays, a member of the FTSE 250 index of medium-sized firms, has already fallen out of favour among investors as the economic outlook has deteriorated.

Its shares have lost 18pc of their value since the start of the year even though the company reported record fees from clients for the first half of its current financial year. More details of its recent financial performance are due to be released on Thursday.

The firm benefits from a wide spread of operations: it has exposure to 20 sectors across 33 different countries. It also focuses on temporary positions, which have historically proved less cyclical than permanent roles.

While this could provide a degree of resilience relative to rival companies, its share price is likely to be volatile and closely correlated to the world’s economic prospects over the short run. After all, companies are far less likely to hire staff when they face greater financial uncertainty and more challenging operating conditions.

Encouragingly, Hays has a solid financial position with which to confront a more difficult economic future than previously expected. It had net cash of £237m at the end of 2021, while net finance costs were covered more than 13 times in its latest full year.

Its “asset-light” business model does not require significant ongoing investment. This means it has a long track record of being highly cash generative. As a result, it paid significant dividends in the years before the pandemic.

Between the 2017 and 2019 financial years it paid 25.68p per share to shareholders via a mixture of interim, final and special dividends. Following a pause in dividend payments in 2020 in response to the pandemic, it paid a special dividend of 8.93p per share alongside a 1.22p per share final dividend in respect of the 2021 financial year.

In future, it intends to return all capital above a £100m cash buffer to shareholders in each financial year. Although dividend payments will inevitably be somewhat variable as a result of the cyclical nature of its business, Hays could nevertheless provide a substantial income stream over the long run.

In terms of growth opportunities, the firm continues to invest in less mature markets that offer greater structural growth potential. It is also seeking to increase its market share in sectors that offer attractive long-term prospects and rising employment demand, such as the green economy and life sciences.

Its solid financial position enabled it to increase the number of consultants it employs by 15pc in the first half of the year. This should improve its capacity to grow market share in the coming years.

Following the recent fall in its share price the company now trades on a forecast price-to-earnings ratio of 13. Its market value has declined by 22pc since this column concluded that “there is no reason for anyone to buy” in February 2021.

Now, though, its share price offers a relatively wide margin of safety in expectation of more difficult trading conditions. In Questor’s view, Hays has the financial means to survive them, should they occur, and then benefit from a likely long-term economic recovery. Its capacity to generate cash, and willingness to pay it to shareholders, means it offers long‑term investment appeal.

Questor says: risky buy

Ticker: HAS

Share price at close: 120.4p

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