Shares in recruitment firm PageGroup (PAGE) suffered their worst one-day fall since 2017 after the company warned that full year operating profits will be in the bottom half of the range of analyst forecasts.

Despite a record second quarter, with 16 countries growing net fee income by more than 10%, the firm cautioned that weak macro-economic conditions meant operating income for the year to 31 December would be ‘towards the lower end of the range’ of estimates.

The consensus for full year operating earnings was £161m with a range of £156m to £168. This compares with profits last year of £142m.

The end results is a smashed share price, crashing more than 15% to 426.8p, wiping out entirely the substantial gains previously made in 2019.

The warning comes even as PageGroup racked up a record quarter with net fee income up 7.4% in constant currencies to £225m. Core markets such as Germany and the US grew their income by more than 20% thanks to technology hires in the former and strong regional demand in the latter.

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Today’s warning is a stark reversal of the situation 12 months ago when the company raised guidance for full-year operating profits thanks to its fastest level of like-for-like income growth for seven years.

Unsurprisingly, then as now the UK market was the worst-performing area in terms of hiring and fee generation although in this year’s second quarter UK net fees are only 2.4% lower than a year ago.

Brexit-related uncertainty is ‘impacting candidate and client confidence’, in particular at the more senior level where the Michael Page brand saw a 6% fall in fee income. Headcount at the brand has been reduced in response.

Given that the UK represents just 16% of profits, and that several of PageGroup’s large markets are still showing double-digit increases in fee income, investors may feel hard done by with the shares suffering such a sharp sell-off.

Europe, the Middle East and Africa (often shortened to EMEA), which makes up almost half of group fees, recorded an 8.7% increase in the second quarter driven by good performances in France and Germany, while Asia-Pacific, which makes up another 20% of fees, grew by 6.4% driven by Japan and India.

Although China continues to act as a drag, with fees down 1% in the quarter, other large developing markets such as Argentina, Brazil, Indonesia, Mexico and Thailand all showed significant gains.

However, markets are prone to shoot first and aim later and news of a cut to earnings forecasts was bound to send PageGroup shares skidding lower, especially with ongoing trade wars, political unrest in Hong Kong and Brexit all possible triggers for slowing profits growth ahead.

Investors need to re-set their expectations and decide whether the new lower rating for the shares is attractive enough to offset the increased business risk.

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Issue Date: 10 Jul 2019