Friday 31 August 2012

Randstad (RAND NA) ... put-ting away for a rainy day

Hays (HAS, mkt cap £969m) reported its full year numbers yesterday. As expected, the outlook appears cloudy and so it opened around 70p/shr, or 9% down. I closed my short in Hays and long in Michael Page (MPI, mkt cap £1.0bn) (see link). I may have jumped the gun. Hays could go lower. But then I’d made 11% on my HAS short, lost 3% on my MPI long and I’d been short HAS by a factor of 2 to long MPI on 1.That seemed a good return in just over a week.

What I reckon should go lower on the back of Hays’ outlook statement is Adecco (ADEN VX, mkt cap CHF8.0bn) and Randstad (RAND NA, mkt cap €4.4bn); the world’s 1st and 2nd largest recruitment companies, respectively. So I looked at the prices of puts in RAND.

If fundamentals were fully at play, I can see both ADEN and RAND steadily falling as we get closer to 2013. The market is expecting 12% EPS growth for RAND in 2013, rising to 17% growth in 2014, paying a P/E of 10.5x for those 2013E earnings. That seems optimistic to me and predicated on another dollop of new money. Trying to work out what central bankers will do makes second guessing where this market will be by year’s end pretty tough. If the ECB President Draghi gets his way then the market could get a shove higher. However, if BUBA President Weidmann keeps resisting, then it’s difficult to see what props euro land up against the weak fundamentals.

Either way, looking at the RAND puts, I was amazed. December puts in Randstad seem proper value. With the shares trading today at €25.5, December puts with a €20 strike could be bought for c. 35 €cents. RAND found a floor as low as €9.35 in the big bout of chaos we had in 2008/09. If Draghi fails to deliver, economic data remains weak and chaos reigns again, then that €9-10 level could be revisited before year end. In that event, a €20 strike costing 35 €cents, delivers me €10-11; or c. 30x my money. That seems to be astonishing odds and I can’t understand why they’re so high. Maybe the potential for euro weakness lessens the return? Even so, I still reckon it’s staggering value. So I tucked away some puts for a rainy day.

Randstad share price
Randstad valuation, 2013E P/E and EV/EBITDA
Randstad consensus 2013E earnings momentum
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