(Repeats Tuesday item)
* Adecco, Randstad seen benefiting from subsidies, auto
* French unemployment, labour law supports part-time hiring
* Stocks undervalued relative to sector peers
* Fund manager warns timing may not be right yet to invest
By Sudip Kar-Gupta
LONDON, July 29 Despite high unemployment, weak
economic growth and complex labour laws, France is offering an
unlikely glimmer of hope to beaten-down staff recruitment firms
such as Adecco and Randstad.
The euro zone's second-biggest economy has been a mixed
blessing for recruiters in recent years. French labour laws and
work contracts make it costly to hire and fire employees,
increasing the attractiveness of temporary staffing, but overall
demand for labour has suffered during the tepid recovery.
However, a recent upswing in demand for industrial workers
as the car market rebounds may signal a change in fortune, with
analysts pointing to pockets of activity in temporary staffing
despite investors' perceptions that France remains the "sick man
A government tax credit designed to stimulate employment
also looks likely to help.
"While France is still not doing very well (overall), the
temporary jobs market seems to be recovering," said Jos
Versteeg, senior equity analyst at Theodoor Gilissen.
As a result, analysts are looking again at Swiss-based
Adecco, the world's largest staffing company, and Dutch group
Randstad, for both of which France is an important market.
KBC Securities raised its rating on Randstad to "buy" from
"hold" this week, saying its prospects were slowly improving.
Adecco is on track to deliver its highest annual EBITA
(earnings before interest, tax and amortisation) margin this
year since before the financial crisis, Jefferies estimates.
Both companies' shares have risen in the past two weeks,
although they remain down for the year.
France is already the biggest market by revenue for Adecco
and the second-biggest for Randstad. It is also important for
their U.S. rival Manpower, which reported higher
second-quarter revenues in France last week but said its
performance in there had nevertheless been sluggish.
In recent years, Randstad and Adecco have suffered as a
result of France's record high unemployment of close to 3.4
million - the jobless rate is above 10 percent of the workforce
- and both have closed branches.
As firms cut costs, temporary staff are the first to go,
partly due to the rigid labour laws, but this inflexibility can
also translate into good business for the recruiters when things
start to pick up.
Between 2000 and 2012, official intentions to hire permanent
staff grew 4 percent, lower than a 14 percent rise for temporary
placements and a 76 percent surge for short-term contracts,
French Labour Ministry data shows.
A factor in the brightening outlook is the "CICE" government
tax credit. Launched in 2013 and sweetened this year, it
effectively cuts payroll taxes on the salaries of employees that
are at or just above the minimum wage, and the subsidy goes
straight on to the bottom line of staffing firms.
Some analysts see it helping the recruitment companies for
years to come. "The current scheme runs through 2016. But France
is full of subsidies, so there is a good chance it will be
extended thereafter," said Theodoor Gilissen's Versteeg.
Some investors remain cautious, with French business
activity still shrinking in July, although more slowly than
"It's an interesting theme, as the interim staffing business
is usually a leading indicator on economic recovery," said
Frederic Rozier, fund manager at Meeschaert in Paris.
"However, we haven't yet seen a significant impact of the
French job tax credit on the results of staffing companies, and
now with doubts rising again on the outlook for economic growth
in Europe and elsewhere, it might be too early to buy these
stocks," he added.
Shares of French-focused recruiter Synergie, whose
market value is much smaller than Adecco or Randstad's $9-$14
billion, are up 30 percent since the start of the year.
According to Thomson Reuters StarMine's "SmartEstimate",
which favours top-rated analysts, Randstad's earnings per share
are expected to grow 21.9 percent over the next 12 months, while
those of Adecco are forecast to be up 18.4 percent over the
Adecco trades at a forward price-to-earnings ratio of 13.44
and Randstad at 12.74. Both are lower than a median of 17.87 for
a basket of eight staffing stocks including Michael Page
and Hays, which are more exposed to a swifter economic
recovery in Britain.
In May, Adecco said CICE had contributed to a 230 basis
point increase in its French margins in the first quarter, while
Randstad said in April that the subsidy had similarly lifted its
first-quarter French margins by 200 basis points.
In addition to margin protection, Yasmina Barin, an analyst
at Swiss bank SYZ, said gradual recovery in the industrial
sector would also likely help revenue.
"We expect solid sales development for Adecco," said Barin.
"It should benefit from some inflexion in France, supported by
improving trends in cyclical sectors such as industrials."
(additional reporting by Blaise Robinson, Vincent Flasseur and
Vikram Subhedar; graphics by Vincent Flasseur, editing by Lionel
Laurent and David Stamp)