Matchtech Group PLC: Infrastructure Projects Set To Continue

The trading update to the end of January confirms that Matchtech Group PLC (MTEC.L) is on track to meet our forecasts, with an 8% net fee income (NFI) growth in the first half. Demand for highly-qualified engineering and technology contract staff continues to be good, with 5% more contractors on assignment than in the previous year. Unlike some others in the recruitment sector, Matchtech’s permanent fees are also stable, despite subdued confidence. The shares are trading around 10% below mid-sector on an EV/EBITDA basis and carry a premium (covered) yield.

Large-scale infrastructure projects set to continue
The new streamlined reporting structure outlined at the year end highlights the key top-line drivers; clearly the strength of the group’s offer in Engineering and the growing market share of the Professional Services with contract NFI significantly outperforming permanent recruitment. Engineering represented 63% of group H113 NFI. Matchtech’s market positioning, supplying highly-skilled engineering and technology contractors and permanent staff predominantly into large UK-based customers working across the globe, puts it in a very different position to a general workforce provider subject to the vagaries of GDP. The number of large-scale projects in the UK looks set to continue as the Government moves to stimulate the economy, with the further extensions of HS2 and a potential North-to-South London Crossrail2 both having been aired in the last few days.

Professional Services building scale
The Professional Services recruitment area (37% NFI) gives breadth to MTEC.L’s operations and should trade according to a different cycle. Growth in contract NFI in this division has picked up strongly (+28%), but permanent recruitment is still being reined in by candidate vacillation and existing employers preferring to retain staff rather than recruit and train in the face of continuing economic uncertainty.

Valuation: Unjustified discount
The larger recruitment stocks have shown some share price recovery over the last six months, but are still well below their peak of last spring. Domestic and international economic prospects have continued to be mixed at best. Sector sentiment remains subdued. On our unchanged forecasts, MTEC.L sits around the top of the pack on EV/NFI but at a c 10% discount to the average EV/EBITDA on current and prospective years. Its balance sheet continues to improve (we forecast gearing a 42% fall by the July year end) and the shares also carry a (1.8x covered) 5.8% yield, approximately a 63% premium to the sector average.

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