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SThree Interim results

SThree Interim results

Special dividend denotes confidence

We thought the interim results were in line with expectations. However, what spooked the market was the comment that some softness had been seen in the UK in recent weeks. While this represents a cause for concern and could result in the shares marking time ahead of the Q3 IMS in September, we think the UK is less operationally geared than the international businesses. We think the proposed payment of a special dividend highlights confidence in the outlook and the group's abilities to generate cash. As such, we retain our Buy recommendation.

 Key features of result tell a conflicting story? The key features of the interim results were the announcement of a special dividend and the comment within the outlook statement that the UK had softened in recent weeks. The share price has since reflected the latter issue, suggesting some concerns that FY2011F expectations may not be met.

 Interim results in line

 The interim results were broadly in line with expectations, with NFI, adj. PBT and adj. EPS rising 21.1%, 52.0% and 53.8% respectively. The special dividend of 11p (representing a yield of 2.8%) and an increase of 17.5% in the interim dividend to 4.7p (suggesting a FY2011F dividend of 14.0p, highlight the strong balance sheet and cash flow characteristics of the company in addition to greater confidence in the outlook, in our view.

 UK less operationally geared While our FY2011F expectations are demanding, requiring a 9.9% uplift in H2 conversion rate from H1, the group improved on this at a similar point in the cycle in FY2005. While the UK remains an important part of the business, it is less operationally geared owing to a greater dependence on contract and lower perm fees.

 BUY retained

 We have maintained our Buy recommendation, feeling that despite a degree of softness in the UK market (and in particular, banking), we think there remains a good possibility that our estimates will be met. Should this be the case then we think the shares remain cheap. Meanwhile, the shares may drift until the trading statement in early September.


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