JPMorgan Coverage Reinstated on Adecco and Randstad

Investing.com — On Thursday, JPMorgan reinstated coverage on Adecco (SIX:ADEN) and Randstad (AS:RAND), notable names in the European Employment Services sector.

The firm placed Adecco shares on Negative Catalyst Watch as the company's full-year 2024 results are anticipated on February 26th. This move reflects concerns regarding the staffing industry's recovery potential and Adecco's performance relative to its competitors.

Adecco’s shares fell 1.5% during European trading.

Staffing Volume Declines

According to JPMorgan's analysis, temporary staffing volumes have continued to fall across crucial regions including France, Italy, and the United States. This trend contributes to a cautious outlook on the sub-sector's potential recovery through 2025.

JPMorgan's staffing tracker indicates that both Adecco and Randstad are experiencing approximately a 4% decline in Q4-to-date volumes. Additionally, the Indeed hiring index shows a double-digit percentage drop across France, Germany, the UK, and the US, which is likely to further impact gross margins.

Preference for Randstad

JPMorgan expressed a preference for Randstad over Adecco, pointing to easier comparisons as it approaches 2025, greater exposure in the United States, and a more robust market position that could offer a competitive advantage. The firm also predicts Randstad will have more room to return excess capital to shareholders.

In contrast, Adecco is facing numerous challenges, including the risk of a significant dividend cut, cautious market demand, and margins lagging behind peers, despite a cost-savings initiative believed to be on schedule.

Financial Vulnerability of Adecco

The report underscores Adecco's vulnerability due to high leverage, with net debt to EBITDA projected at 3.0x for fiscal year 2024. This financial pressure, coupled with weak staffing volumes, declining margins year-over-year, and a strengthening Swiss Franc, leads JPMorgan to forecast a 50% dividend cut in fiscal years 2024 and 2025.

Analysts, led by Karin So, noted,
> “Our sensitivity analysis suggests that leverage will not reach its mid-term target of <1.5x if the cash dividend is maintained.”
They added, “Our base case scenario of a 50% cut will de-lever to approximately 2.0x by FY26E, but in a slower recovery, we foresee a bear case scenario of a 100% cut for the next two years.”

Conversely, Randstad’s balance sheet appears stronger, with net debt to EBITDA expected at 1.0x for fiscal year 2024. JPMorgan indicates that Randstad may be in a position to provide excess capital returns while reducing its leverage.