After a profit warning Thursday, shares in Robert Walters (LSE: RWA) lost 13.7% at one point during morning trading. At the time of writing, the price has recovered around half of that initial loss and is sitting on a less scary fall of 6.5%.
The share price had a lacklustre 2019, but that seemed like a rerating after an overheated peak in 2018. Over the past five years, it’s up 70%. Compared to 10% for the FTSE All Share, that’s an outstanding performance.
Brexit
But now, the recruitment specialist has suffered from the 2019 scourge that is Brexit, as the political and economic uncertainty has led to many companies adopting a cautious approach to hiring new staff.
Gross profit in the UK (equivalent to net fee income) fell 23% in the fourth quarter, down from £26.8m to £20.7m, but UK performance really needs to be seen in the context of the firm’s total business. With 78% of Robert Walters’ net fee income coming from outside the UK (up from 74% a year ago, after the UK shortfall), the overall quarterly fall was a relatively modest 8%.
Net fees from the Asia Pacific region (the company’s biggest) dropped 4%, Europe was actually up 1%, while remaining international business dropped 7%. Market conditions in Hong Kong were, unsurprisingly, described as “extremely challenging given the ongoing protests.”
Chief executive Robert Walters summed it up with “Trading conditions in the fourth quarter proved challenging with client and candidate confidence impacted by political turbulence around Brexit, the UK general election, Hong Kong protests and the US-China trade standoff“.
Strength
But, you know, that’s a pretty hefty bag of troubles to arrive all in one year, and I think it’s testament to the company’s resilience that overall net fees dropped by only 8%.
It also seems wrong to me, especially for a company like this, to base one’s valuation of the shares on a single year’s performance – and the subsequent partial share price recovery after Thursday’s initial sharp drop might well be due to longer-term investors picking up a quick bargain.
That it’s a cyclical and erratic business is apparent from the share price chart – there’s that very nice five-year return, but it’s been volatile. Now, I don’t find much value generally in share price charts, but looking back on past volatility can, I think, help us evaluate the risk with a stock. In the short term, I think this is a risky one.
But the short term doesn’t matter to me, and the longer one’s investment horizon, the more the cyclicality evens out and the more a stock’s long-term potential comes to the fore.
Buy?
But when it comes to falling shares, what of my insistence on not buying a recovery stock until the recovery is clearly in progress, and not buying one that’s saddled with a lot of debt?
Well, there’s no debt, with £54.4m net cash on the books at 30 June. And I don’t see any need for recovery, as there’s nothing wrong with Robert Walters’ business – it’s just natural cyclicality.
When new forecasts come in, I can still see a price-to-earnings of about 12 with dividends yielding around 3%. For a quality cash-rich company, I see that as a buy.