CONSUMER CYCLICALS: Adecco; equity analyst flag defence spending as tailwind
(ADENVX; Baa1 Stable/BBB+ Neg) (Equity +9%)
We would be cautious on expecting cash or CDS to head any wider from here.
We did not cover Adecco in the immediate aftermath of FY results. We had heavy cautions on this co when it came to primary in October - that line is +3 wider since or +18 from tights on the break (vs. IG -5 tighter; all v swap). It is the highest levered of the 3 staffers (MAN, RANDNA the other two) after its acquisition of tech consulting arm Akkodis (which is riding high-beta to this downturn). The 'buts' to this is its FY24 performance has not been the weakest (see RANDNA) and WC/cash flows have been managed well last year. Its guidance for this year is also better than the other two (particularly MAN guiding to -5-9% fall next quarter) but it is hard to take the staffers on their word (they are simply trying to call the cycle bottom). Still fiscal spending boost in Europe is a positive for these co's (60-70% exposed to the region). Barclays equity analyst are out with a street high price target today as they flag an apparent 5% exposure from the co to the Aerospace and Defence sector. We don't have enough in its numbers to call value but equally see 2-notches worth of downgrades already priced. There will be lingering questions on how much of the staffers performance is structural including the impact of AI on both the labour market (longer-term) and on skill matching platforms (shorter-term). Adecco was reporting market share gains over the year and is painting AI as a positive with investments it is making into it.
- It reported net leverage at 2.8x and said immediate priority was to delever below 1.5x
- This excludes €520m in leases - including which it is n/g 3.4/3.9x
- It cut the dividend but will still pay 42% of net income or CHF1.0/share
- This is €168m and is down from the low €400m it has paid in recent years.
Note FY24 cash flows did remain surprisingly firm; FCF at €563m
- This is €168m and is down from the low €400m it has paid in recent years.
- It's feedback on conditions to date (Feb 26th) were somewhat more optimistic than peers with it saying "volumes stabilising throughout Q4 and improving momentum in early 2025" (similar to Randstad but RAND also implied 1Q organic growth will be around -5.5% level).
- There is mixed evidence of that in the Adecco's 4Q numbers: sequentially core Adecco remained down -5% yoy, Akkodis accelerated its falls to -6% (from -5% in Q3), while LHH showed clear stabilisation at -3% (vs.-7% in Q3). Note core Adecco makes up ~80% of group revenues.
- By market it was very similar to peers in reporting continuation of trends; "LATAM, APAC, Southern Europe continue to grow, whereas, for example, in Northern Europe, in France, in the UK, in Germany, they continue to be down, and they continue to be challenging markets overall"
- It is guiding to gross margin improvement QoQ and SG&A to stay flat.
- Expects FCF to remain firm but note Q1 is seasonally weak (outflow)