Favorable setup; up to Buy and add to the Conviction Buy List
* Source of opportunity
The risk reward for Randstad’s share price, ahead of 1Q results on April 30,
is favourable, in our view, and as such we upgrade to Buy (Neutral) and add
it to the European Conviction List. 1) The shares are the worst performing of
the staffers year to date, down 13% vs. Adecco up 2%. 2) The valuation
multiple has compressed this year from 11.5x 2014 EV/EBITDA to 9.3x (IBES
consensus). 3) Labour market data points and employment surveys are
supportive of improving growth in Randstad’s end markets; moreover, the
GS Global Lead Indicator (GLI) recently moved into an expansion phase,
historically this has correlated with positive share price performance.
* Catalyst
We forecast €128 mn of EBITA in 1Q, 11% above company compiled
consensus of €115 mn. Largely due to our gross margin being 20 bp higher
than consensus at 18.2%, reflecting further benefits from the French low
wage subsidy and a positive mix impact from improving permanent staffing
growth. A 10 basis point change in gross margin has a 3% to 4% impact on
our EBITA. Our FY14 and FY15 EPS forecasts are 10% and 12% above
consensus. A beat at 1Q would contrast the miss at 4Q which led, in our
view to the weak share price performance.
* Valuation
Our 12 month price target of €56 (was €53) is derived from a target
EV/EBITDA multiple of 10x applied to our 2015 forecasts. There is no change
in our methodology, though we change our estimates to reflect our more
positive view on gross margins, which drives the increase to our price
target. The shares trade on 14.3x and 11.4x FY14 and FY15 P/E for 26% EPS
CAGR (2013-2016).
* Key risks
Risks include overestimating the positive impacts on the gross margin, SGA
cost increases outstripping top line growth.