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(Sharecast News) - Berenberg initiated coverage of recruiter SThree on Tuesday with a 'buy' rating and 550p price target, which offers around 30% upside.
It noted that SThree specialises in placing skilled professionals into STEM (science, technology, engineering and mathematics) jobs.
"The group's STEM expertise exposes it to clear drivers of long-term growth, while its weighting towards contract placements offers an attractive earnings and cash profile, with capital allocation optionality to enhance organic returns," it said.
The bank said SThree's footprint covers 82% of the global STEM market, where a skills shortage has been exacerbated by accelerated investment in digitalisation and healthcare, and decarbonisation.
"This structural undersupply of STEM talent acts as a compelling long-term growth driver. We expect STEM employment placements and associated recruitment fees to significantly outstrip non-STEM market growth, supporting our 3.3% net fee compound annual growth rate for FY 2024-FY 2026," it said.
It also argued that a quality operating model puts SThree on a par with professional service peers.
"SThree's contract-focused operating model differentiates it favourably and markedly from a basket of generalist staffers," Berenberg said.
"A contract order book offers earnings resilience and visibility, while the group's structurally higher margins, net-cash balance sheet, and consistency of free cash flow conversion places it alongside an evolved peer group of consultant-led, quality UK professional service companies."
Berenberg pointed out that despite a quality operating model offering high-teens margins, mid- to high-single-digit organic operating profit growth, and a circa 30% return on capital employed on a strong balance sheet, the valuation does not reflect this, at just 9.5x FY 2025 price-to-earnings.
At 1130 GMT, the shares were up 1.2% at 424p.
