Morgan Stanley downgrades Hays, cites 'multiple reasons to be cautious'

(Sharecast News) - Morgan Stanley downgraded recruiter Hays on Wednesday to 'underweight' from 'equalweight' and cut the price target to 55p from 64p, citing "multiple reasons to be cautious".

"With downside risk to FY26 consensus expectations, a weaker balance sheet and heightened risk of a dividend reset - though we acknowledge this is partly reflected already - and debate on cyclical versus structural headwinds, we see Hays' risk reward profile as tilted to the downside once again," the bank said.

Morgan Stanley noted that staffing data in Germany and the UK - which account for around 50% of group net fees combined - has recently been weak and Hays' comments on job flow deterioration in June reads negatively for the group's short-term outlook.

"We fear this weakness could be a drag through 1Q/2Q26 and therefore assume net fees continue to decline in FY26e (circa -3%)," it said.

"While we are roughly aligned with consensus on net fees, we see c-10% downside to consensus operating profit forecast over the next two years on average." The bank said consensus expects £12m more operating profit in FY26e on £20m lower net fees.

"While we acknowledge Hays' dedication to reducing its cost base, we think this is too ambitious and believe £46.5m is a more reasonable forecast at this point," Morgan Stanley said.

It said that contrary to some of the other staffing companies it covers, it thinks the negative earnings momentum revision might not be over quite yet.

The bank said Hays should generate only £12m of free cash flow this year, on its estimates, and reach a net cash position of £20m by the end of FY25.

"While this means the group can easily navigate the challenging environment and would be able to cope with our worst case of a recession environment in FY26e, this is not enough to sustain the current shareholder return policy.

"While we acknowledge a potential dividend cut is well-expected by the market and already partly reflected in consensus, it means Hays is currently trading on circa 1% dividend yield (we assume 2.5x cover ratio, implying a c.80% dividend cut) a very low level by historical standards and versus other staffers. We see limited room to increase cash return to shareholders meaningfully before FY28e."

At 0945 BST, the shares were down 2.5% at 65.55p.

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