Harvey Nash Group Plc (LON:HVN) has released a trading update ahead of final results for the year ended 31 January 2018 this morning. Overall trading was in line with market expectations, with adjusted profit before taxation up c22% compared to the prior year. We are maintaining our headline forecasts on the back of these results, and continue to believe the valuation remains compelling at this juncture.
* Trading update: UK & Ireland gross profit (38% of group NFI) is up 6% year on year, which we believe is above average for the sector, with demand improving through H2 in particular for technology recruitment despite widely reported Brexit-related market volatility. Mainland Europe (40% of group NFI) continues to be the key driver of organic growth in the Group, with Gross Profit up 5% overall year on year. The performance in the ROW (22% of group NFI) was weaker, driven by the groups restructuring efforts during the year. The company has reduced contractor numbers, closed loss-making offices and focused on its core markets. We would expect to see the benefits of this restructuring programme coming through in 2019E.
* Performance drivers: Adjusted PBT growth of c.22% implies a full year number marginally ahead of our forecast of £10.6m. Full year net debt is expected to come in higher than forecast as a result of higher working capital commitments driven by the normalisation of debtor days during the year after a strong performance in 2017A. The business model is highly cash generative, trading cash generation has funded two acquisitions during the period, and financed the international restructuring programme. Acquisitions made during the year are expected to be earnings enhancing.
* Forecasts: We leave our headline P+L forecasts unchanged following this update, we expect a 3-year EPS CAGR of 17.3% out to 2020E which we believe compares favourably with the sector average, albeit we note that we remain at the upper end of consensus for 2019E onwards. Clearly trading uncertainty remains across the sector, we will review our longer-term assumptions following the full year results announcement, when the company provides some more detail on the outlook.
* Valuation: At last nights close price, Harvey Nash Group Plc trades on an FY19 P/E of 6.4x (falling to 6.1x in 2020E) and an EV/EBITDA of 3.8x (falling to 3.3x in 2020E), a compelling valuation alongside an attractive 4.9% dividend yield. We remain comfortable with our blue-sky analysis in our initiation note (12 September 2017) showing the Group delivering an EBIT of £17.5-20.0m in the medium term, which implies a share price range of 154p-172p discounted back by 3 years at 10% applying a modest through the cycle P/E of 12x.
