RBC upgrades Hays to 'outperform', notes sufficient upside

RBC Capital Markets upgraded Hays to ‘outperform’ from ‘sector perform’ but trimmed the target price to 140p from 150p.

It said the stock has come a long way despite only seeing a minor slowdown in second quarter growth with a weaker UK being offset by Europe.

“Despite factoring in a slower for longer scenario at Hays, we now see enough upside to our mid-cycle valuation, whilst the balance sheet and potential cash returns are supportive,” said the bank.

RBC said Q2 net fee growth of 7% was in line with its estimates, adding that while the UK had slowed more than expected and Australia remains tough, Europe has offset this.

It said management has done a good job in recent year as far as cash flow is concerned. It expects first half net debt of £57m and for the company to move into a net cash position by the end of the year.

“Even with a lower growth outlook, we see scope for cash returns in 2017 to the tune of £30-40m, with the potential thereafter to pay out 100% of free cash flow post dividend, which we forecast to be in the £75-80m range, assuming there are no acquisitions.”

RBC noted media speculation over the years regarding Hays as a takeout candidate for the bigger generalists.

It said it would not rule out a takeout in the medium term, pointing to Hays’ market-leading positions in the UK and Australia and excellent German business.

At 0930 GMT, Hays shares were up 2.8% to 127.10p.