Harvey Nash Group plc (LON:HVN) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview
Q1: Harvey Nash Group, they moved to AIM at the end of July this year but what can you tell me about them?
A1: So, Harvey Nash is an international recruitment business & it’s got operations around the globe so last year UK & Ireland generated about 40% of gross profits, Europe about 40% & the rest in the US & Asia. It specialises in the technology sector so just over 80% of candidates are placed in this end market & it’s got a nice balance of permanent placements, contract placements & it also does a range of managed services & outsource solutions as well for its clients. So, the idea here is it’s got a broad mix of services to provide client solutions across the business.
Q2: They announced today the acquisition of Crimson, what are your thoughts on this?
A2: Yes, we think it’s a good deal. I think Crimson is also a well-established business but both companies know each other & have had close relationships when hiring in the CIO community, they’ve got hugely complimentary business models as well. We think the price paid & the way it’s structured is very sensible too & we think this will ultimately fit well with the business & it’s also good to see that the founders of the business are staying on & are incentivised to drive this business forward under a larger brand of Harvey Nash.
Q3: You initiated coverage on them today, what assumptions were made in your forecast?
A3: We’ve included both acquisitions that the business has done recently since going on AIM so they also did an acquisition of a business in the Nordic region where Harvey Nash are very strong & we’ve also baked in conservative assumptions for Crimson. So, we expect this business to generate just over £2 million of PBT on an annualised basis but I think to achieve the maximum amount of £15 million, this business would have to be generating an EBITDA in excess of £3.5 million. So, we feel that our assumptions are still way below the target or the aspiration of what both parties would want to achieve.
Q4: Off the back of that then, how does the valuation for Harvey Nash Group compare to its peers?
A4: The valuation looks very attractive if you compare it with the wider recruitment sector, January ’18 PE of just short of 8 times, EV/EBITDA of 4.5 times & a dividend yield of just over 5%. That is a 45% PE discount to the recruitment sector & 37% discount on an EV/EBITDA basis & the yield is well above average in the sector as well with dividend cover building towards 3 times on our 2019 forecasts. I think, compared to the rest of the sector, the business looks attractive from a valuation, growth & yield perspective.
