USG is publishing its 1Q11 results on 21 April before market. The company is expected to report € 773m sales. Sales growth is set to reach 13% in 1Q11, just above the 12% posted in 4Q10. Revenue growth in the Netherlands remains sluggish, forecast at 6% in 1Q11 versus 4% in 4Q10 due to the difficult professional and specialist staffing segments. The Dutch public sector remains distressed. Sales growth in Belgium is still accelerating, reaching 14% in 1Q11. Growth in the early cyclical markets France, Germany and Italy is expected to slow a little as comparables become increasingly more difficult.
Assuming € 140m operating expenses and € 6.5m depreciations, REBITA lands at € 18m. The REBITA margin is expected to improve 90bps y/y to 2.3%. Belgium remains the best performing country in terms of profitability. The Belgian REBITA margin is estimated at 6.5% in 1Q11, up 100bps y/y. Sales growth in the Netherlands is not yet strong enough to unlock any operating leverage. We believe that the Dutch REBITA margin will continue to hover around 4%. In France, the REBITA margin is expected to take a hit due to the cancellation of the French low-wage subsidy system in December last year. The negative effect should gradually ease in the course of the year as staffing companies intend to pass on the cost increase to its customers.
The REBITA margin is expected to reach 3.0% in Germany, much better than the same period last year, which was loss-making but still significantly below peers (45,63 EUR, 0,00%) and Randstad. We expect Spanish operations to remain loss-making in the first quarter of the year and do not see any signs that an improvement will come soon.
The gross margin is set to decline by 30bps q/q and by 80bps y/y to 21.3%. The culprit here is the cancellation of the French low-wage subsidy system. USG aims to pass on this cost increase to its customers gradually over the course of the year. Besides this negative effect, other factors impacting the gross margin are developing more positively: perm fees are growing and pricing shows improvement. Mix effects however are not expected to turn positive yet in 1Q11 as the Dutch professional and specialist staffing business is still declining. 9.010.011.012.013.014.015.016.017.018.0
With € 7.5m in amortizations, € 4.9m in interest charges and € 1.8m in taxes, net income should land at € 3.9m, up from € -8.5m in 1Q10. Our forecasts are close to consensus. Consensus is looking at sales of € 772m, a € 168m gross profit, € 18m in REBITA and € 4m in adjusted net income.
Ahead of the results, we keep our Accumulate rating and € 16 target price. Valuation remains very attractive but we remain cautious on the short-term share price potential: i) we expect the recovery in the Dutch market –on which USG is still very dependent –to continue at a slow pace. Accelerating growth in the Netherlands is the main share price trigger for the stock in our view. ii) USG’s scale in its smaller markets – Spain, Poland, Austria and Switzerland –remains insufficient, which hampers profitability. M&A is needed to improve this situation.