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According to Deutsche Bank Equity Research Randstad shares will likely remain very volatile but are no longer a clear Sell.
The company says in its latest analysis "We see less earnings risks but believe it is too early to predict that a recovery would beat expectations. Upgrade from Sell to Hold, with a new TP of 28.5 Euro."
"Randstad is down 11% since mid-September and fell by as much as 17% after Q3 results. However, the top line outlook is improving quickly and this reduces the earnings risk. Our thesis on weaker gross margins is playing out and we believe the share price in credible mid-cycle profitability, but growth could be front end loaded and the shares could overshoot."
"With little short term negative catalysts on the earnings we are upgrading to Hold, TP 28.6 Euro. Staffing company valuations do well as long as there is accelerating GDP growth. In the short term, we believe Randstadâ€™s share price already implies GDP growth of c.4% year-on-year in H2 10e and we look for a better entry point."
"On depressed profit, small revenue and cost changes have a significant effect and we are upgrading our 2010E sales forecast by 3% and our 2010E EBITA by 31%. Our mid cycle (2012E forecasts) remain essentially flat as we have not changed our view on mid-cycle profitability."
"Our price target is based on DCF using a 4% equity risk premium, a beta of 1.3x and a risk free rate weighted by geographical exposure. Upside risks largely revolve around higher GDP growth than expected as EBITA is 30x geared to GDP. Downside risks centre around weaker economic growth than we expect and a harsher pricing environment which would negate a recovery in volumes."