Randstad: Weak gross margin

Sales increased by 13% (12% KBCS, 13% CSS) to € 4,378m (€ 4,365m KBCS, € 4,380m CSS). Organic growth per working day was 4% (3.2% KBCS) and slowed from just below 7% in September to 4% in December. Organic growth for the full quarter stood at 2% (1.8% KBCS, 2.2% CSS) as a result of 1.5 working day less than in 4Q10. Gross profit came in below expectations at € 801m (€ 812m KBCS, € 813m CSS), implying a margin of 18.3% (18.6% KBCS, 18.6% CSS). The pricing environment remains difficult but is not different from 3Q11.Underlying operating expenses in line at € 638m (€ 645m KBCS, € 639m CSS). REBITA reached € 163.3m (€ 167m KBCS, € 174m CSS), implying a margin of 3.7% (3.8% KBCS, 4.0% CSS). Adjusted net profit stood at € 118.6m (€ 110m KBCS, € 111m CSS). Adjusted EPS came to € 0.69 (€ 0.64 KBCS, € 0.65 CSS). The company reported a net loss of € 16.5m in 4Q11 due to a non-cash impairment charge on goodwill of € 125m. Net debt stood at € 1,303m (€ 1,278m KBCS) at the end of FY11, implying a net debt/EBITDA ratio of 1.8x. The company proposes a dividend of € 1.25 (€ 1.25 KBCS).
 
Organic sales growth and REBITA margin per region: France:+4% (2% KBCS), continuing market outperformance, 2.9% (2.9% KBCS) REBITA margin. Netherlands: 0% (-2% KBCS) with 6.1% (6.4% KBCS) margin vs. 6.8% in 4Q10. The decrease is mainly caused by ongoing changes in the business mix, growth in large accounts and limited contributions from our professional businesses. Germany: +3% (0% KBCS) and 8% per working day. Organic revenue growth per working day at 7% in Dec. REBITA margin of 6.6% (7.3% KBCS). Belgium: -3% (0% KBCS) with 5.4% (5.5% KBCS) margin. UK: -9% (-4% KBCS) with -0.9% (-2.0% KBCS) margin. Iberia: -8% (-4% KBCS) with 3.4% (3.1% KBCS) margin. Other European:+5% (15% KBCS) with 2.8% (3.5% KBCS) margin. North-America: +10% (7% KBCS) with 4.5% (3.7% KBCS) margin. SFN’s results also exceeded expectations. Guidance of synergies upped from annual pre-tax cost savings from $ 29m to at least $ 40m. Integration process is on track. The first branches will merge as from 1 Feb. 2012 and this should be completed by the end of 3Q12. Rest of the World: +4% (6% KBCS) with -0.1% (1.9% KBCS) margin.

Outlook: North-America continues to improve while Randstad faces a gradual slowdown across Europe. Organic growth per working day was 4% in December and 0% in January. In North-America (20% of sales in FY12) growth accelerated: US Staffing: 5% inOct. to 8% in Dec. and 13% in Jan. US Professionals: 15% in Jan. up from 10% in 4Q11. In Jan., growth was 6% in Germany and slowed to -3.5% in France and -2% in the Netherlands.

Conclusion:Sales were well in line but the REBITA margin was lower than expected due to a weak gross margin. Adjusted net profits better than our and CSS forecasts. Growth in the US remains very solid and accelerates while growth in Europe continues to slow, in line with expectations. As operating results came in below CSS expectations, we expect a negative stock market reaction and CSS forecasts to come down. Buy rating and € 37 TP maintained. 1H12 results are expected to reflect the recession in Europe but we anticipate improvement towards the second half of the year. Conditions improve in North-America and Randstad is profiting from its strengthened position here.