The recruitment sector of the stock market is going though one of its seemingly inevitable cyclical slumps. But one company that is performing better than most is Hexagon Human Capital (LON:HHC). And right now, it’s on a dirt-cheap rating.

I was interested to speak to Hexagon’s chief executive Jonathan Wright recently. Jonathan has already had one successful career in this industry, as managing director of the Alexander Mann Group. There, he was for six years number two to Dragon’s Den panellist James Caan. During that time Alexander Mann’s profit grew from £0.1m to £5.4m, before eventually being sold to private equity group Advent International for £25m.

Jonathan set up Hexagon in 2004, partly to run his own show. He also saw the opportunity to combine a head-hunting agency working at the high end of the executive market with an interim management business. The latter is the temporary employment of consultants to execute change programmes or undertake specific short-term projects.

‘The lower end of the food chain,’ Wright told me, ‘is under margin pressure.’ Employers are not prepared to pay big commissions just to bring in junior staff. But when it comes to finding senior executives who could make a real difference to the business – and indeed to the share price – the cost of finding those people is less important.

Building through acquisitions

Wright has built the business through acquisitions. Hexagon has so far bought seven agencies – Archer Mathieson, BIE Interim Executive, Akamai, Euromedica, Oxygen Executive Search, Roberts & Corr and, just last week, the Winchester Group.

This shopping spree has achieved one of Wright’s aims, a broad spread of business to counter the ‘pitching and rolling’ of any one sector. It has made Hexagon the UK leader in interim executive management, ahead of Odgers.

It has also given Hexagon a presence in the overseas markets. Euromedica, an executive search company specialising in the life sciences and healthcare market, has offices in Benelux, France, Switzerland, Scandinavia and India. And Akamai, a business bought from Hat Pin for just £1 in April has an operation in Dubai.

When I spoke to Wright he had just returned from a trip to the Emirates. He was surprised to find that, contrary to the glossy picture of spectacular new buildings there, the basic infrastructure is still quite backward and that the sovereign wealth fund management businesses and Arab owned investment companies are tiny, with just one hundred or so staff. So while these outfits are keen to have some support and assistance from westerners, the size of the market for a company like Hexagon is still quite small.

Little exposure to the problems in the City

The other overseas office is now in Atlanta, by courtesy of the Winchester acquisition. This deal was done in response to the demands of Hexagon’s multinational company clients, who expect a search firm to be able to tap the vast market of American talent as well as just that of Europe. Hexagon’s business is well diversified with its largest sector, pharmaceuticals and life sciences, accounting for about 12% of its business. It has little exposure to the City market where it is fair to say that the number of candidates outstrips the number of vacancies at present.
The business also benefits from the relative stability of the interim executive placement market. Hexagon has about fifteen hundred forty and fifty-something executives on its books. Of these, about two hundred are working on assignments today.

Hexagon’s clients, which include twenty-five of the FTSE 100 companies, will pay up to £1000 per day for their services. Wright believes that today’s testing business climate could persuade even more large companies of the need to implement change programs. It’s a niche that could reward Hexagon in the longer term. Sometimes these interim executives are offered full-time positions by the companies for whom they work, netting Hexagon another chunky fee, and contributing towards the fee income earned by each of its sixty-one professionals.

On average these professionals booked a net fee income of £430,000 each last year, a figure so remarkably high that it is little wonder that Hexagon is a comfortably profitable business with a good cash flow to boot. In the year to March, Hexagon made a profit before goodwill amortisation and tax of £4.4m. This year broker Equity Development is forecasting a figure of £6m, sufficient to generate earnings per share of 25p. That puts the shares on a very low PE ratio of four, a rating that looks even more attractive after Hexagon confirmed that the business was on track at last week’s AGM.

But the AGM revealed something else of interest. That Hexagon has aborted a ‘major transformational deal’, writing off costs of £0.7m. ‘During recent months,’ it said, ‘in response to the dramatically altered market sentiment and associated valuation metrics, the Group’s acquisition model has been modified.

That sounds to me like a sensible way to proceed just now. But until Wright is able to get the acquisition mill rolling again the shares will probably remain out of favour.

Source: A Niche That Could Help This Cheap Penny Share Grow