RBC upgrades Hays to 'outperform', notes sufficient upside

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.