MAN - Recruit Holdings: Global Job Postings Expected To Fall

2023-04-30 10:34:18 ET

Summary

• Recruit remains under pressure from the global job market, with expectations that job openings will continue to fall.
• Raising pricing and increasing job inventory turnover will help in keeping an even keel, but present limited growth prospects.
• Market expectations appear neutral for the shares, and resultant valuations provide limited appeal. We rate the shares as neutral.

Investment thesis

Recruit ( RCRUY ) remains under pressure from falling job opening volumes on a global basis. Market expectations remain relatively low for the business, and we do not expect any positive catalysts in the short to medium term. With fair but not particularly appealing valuations, we rate the shares as neutral.

Quick primer

Recruit Holdings is a Japanese media company with a focus on HR with online job listings (HR Technology), lifestyle media and marketing (Matching & Solutions), and temporary staffing services (Staffing). HR Technology is the core earnings driver, contributing approximately 70% of total adjusted EBITDA, with the remaining segments at 15% each. 55% of total sales are derived from international markets. The company has embarked on a successful globalization strategy since 2010. It has assets such as the job search engine Indeed (acquired in 2012) and job and company intelligence site Glassdoor (acquired in 2018).

Key financials with consensus forecasts

Our objectives

We revisit our buy rating from June 2021 , where we were clearly too aggressive in stating that valuations were attractive and suffered a 45% drawdown. The labor market has normalized post-pandemic but recession fears remain. The recruitment industry continues to face both long-term and structural challenges, such as an aging workforce, shifts in immigration, and attitudes toward work-life balance.

Generally, investing in Recruit is a view on the global labor market, with a geographic emphasis on the US (around 30% of total sales) and Japan (approximately 45% of total sales). The shares have performed more or less in line with its recruitment peers, although direct competitors Adecco ( AHEXY ) and ManpowerGroup ( MAN ) have outperformed by a slight margin versus specialist firms such as Heidrick & Struggles ( HSII ) and Robert Half ( RHI ).

In this piece, we want to assess whether the shares are attractive given this correction.

Mixed messages from management

Q1-3 FY3/2023 results send a mixed message in our view. For the online job listing business (HR Technology - Indeed and Glassdoor), despite Q1-3 FY3/2023 sales growing 38.4% YoY (page 10), expectations are that there will be declining sales into FY3/2024 and FY3/2025, a key negative as it is the core earnings driver for Recruit. Despite management's view that a prevailing global labor shortage should drive job openings, the reality appears different. In the US, the initial post-pandemic boost in job postings has normalized, with levels back down to 2019 levels with a risk of downside as recession concerns loom. The outlook is somewhat worse in Europe and Japan as this process of post-pandemic normalization has yet to occur.

The only riposte management can think of is to increase inventory turnover. One of the businesses' key goals is to simplify job hunting and make the process faster to get recruited. With falling job openings inventory, increasing turnover can lead to a temporary benefit in booking revenues faster but ultimately does not address the falling levels of product to sell.

The negative outlook is compounded by the fact that the company itself has a hiring freeze, and is cost-cutting in areas such as marketing. However, it is said to be investing in AI and Machine Learning to further automate manual recruiter tasks, although we believe there is a risk of too much automation resulting in poor customer experience and a fall in user inquiries.

As a cyclical business, management can only respond in a limited manner to the macro uncertainties. The key focus appears to be that even if job posting volumes drop, Recruit wants to maintain revenue levels by increasing pricing which they appear to be doing. In the longer term, with a shrinking global labor supply, recruitment platforms should be in a position of strength as companies become more reliant on to access quality personnel. However, for the short to medium term the business itself remains reliant on job volume, which we believe will continue to fall.

The renewed weakening of the Japanese yen will have a positive translation impact on FY3/3024 earnings from overseas sales, but with limited positives from underlying trends, we are not expecting to see a positive surprise from upcoming company guidance. The company will disclose these on May 15th, 2023 with Q1-4 FY3/2023 results.

Rising expenses in the remaining business divisions

Matching & Solutions has a domestic focus and has experienced a pickup in activity with Q1-3 FY3/2023 sales growing 16.6% YoY, particularly from the travel and restaurant industries. Stronger-than-expected revenues have resulted in more aggressive spending on strategic investments such as technology and advertising. Unfortunately, with growing signs of an economic slowdown in 2023, management expects business conditions to turn down into FY3/2024.

Staffing providing temporary staff has seen a pickup in Japan, with Q1-3 FY3/2023 sales growing 16.8%. Overseas business sales grew stronger at 19.4% YoY, but under constant currencies growth was limited at 3.8% YoY. Whilst revenue growth overall has been better than expected, margins are under pressure from cost inflation, as well as increasing marketing spend as competition heats up.

Overall, the minor business divisions at Recruit do not appear to have much upside into FY3/2024, mirroring the outlook for the core HR Technology.

Valuation

Market expectations do not appear high for the business, with consensus forecasts estimating single-digit declines in earnings YoY for FY3/2024 (please see the Key Financials table above). Resultant valuations are not too demanding on paper for a services business, with PER of 22.6x and a free cash flow yield of 5.7%. However, operating margins are not stellar at around 10%, and with expectations of falling ROE and a low dividend yield of 0.7%, current valuations hold limited appeal.

Risks

Upside risk comes from the US economy - if the Fed was to start cutting interest rates next year (as some expect), this would boost market confidence and job opening volumes may start to increase from genuine demand as opposed to a temporary reaction to the pandemic.

Recruit can continue to raise unit prices charged for advertised jobs, and continue to increase inventory turnover with automation.

Downside risk comes from global interest rates remaining higher than current market expectations. This will continue to provide some 'friction' against increasing business investment including hiring activities.

With cost-cutting pressure, enterprises may decide to advertise jobs at sites with cheaper prices or look for alternative channels such as free job listings and specialist sites.

Conclusion

Recruit remains a global powerhouse as an online recruitment platform, but it has limited ability to generate organic growth. After M&A and overseas expansion, there appear to be no clear strategic initiatives to drive growth. Despite a net cash balance sheet there appears to be no appetite for new business expansion. We have to stomach the drawdown and rate the shares as neutral.

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