HeadHunter Group Proposes Terms For $200 Million U.S. IPO

Summary

• HeadHunter Group has filed to raise $200 million in a U.S. IPO of its ADSs representing ordinary shares.
• The firm operates an online employee recruiting and related services site for companies in Russia and CIS regions.
• HHR is growing quickly, is profitable, and cash flow positive.
• The IPO isn't cheap, so I'll be watching to see if there is a lower entry point post-IPO.
• This idea was discussed in more depth with members of my private investing community, IPO Edge. Start your free trial today »

Quick Take

HeadHunter Group (NASDAQ:HHR) has filed to raise gross proceeds of $200 million from a U.S. IPO, according to an F-1/A registration statement.

The firm operates an online recruitment platform in Russia and the Commonwealth of Independent States [CIS].

HHR is growing sharply and is profitable and cash flow positive. Management is asking for a steep price at IPO. Perhaps a lower post-IPO price would entice me to become more interested.

Company & Technology

Nicosia, Cyprus-based HeadHunter was founded in 2000 to connect employers with employees in Russia and the CIS through its online recruitment platform.

Management is headed by CEO and Board Member Mikhail Zhukov, who has been with the firm since 2008 and was previously CEO at Helios Computer.

Below is a brief overview video of the company’s technology department:

Source: HHR

HHR has developed the HeadHunter online recruitment website that provides potential employers and recruiters with paid access to the company’s CV (resume) database which, for the year ended December 31st, 2018, consisted of 36.2 million total CVs.

For the same period, management claims its platform hosted 253,000 paying customers, an average of 559,000 job postings daily and, according to LiveInternet, 20 million unique visitors monthly.

The company has a specialized sales team located in Moscow, St. Petersburg and other regional offices that “cater to the specific type of customer, depending on their needs.”

The firm divides its prospective customer base into two buckets - Key Accounts, which have 250 or more employees, and Small and Medium Accounts which are smaller in size and annual revenue.

HHR generates revenue in the following manner:

• Bundled subscriptions - 31.8% of revenue
• Job Postings - 36.4%
• CV Database Access - 23%
• Other value-added services - 8.8%

The average revenue per customer decreased slightly in 2018 vs 2017, as shown in the table below:

Average Revenue Per	Customer
Period	ARPC	Variance
2018	$362.71	-2.9%
2017	$373.62	N/A

Click to enlarge

Market & Competition

According to a 2019 market research report by Adroit Market Research, the global online recruitment market was valued at $22 billion in 2017.

The main factors driving market growth are the convenience and advantages of online recruitment platforms which generate a wider audience reach, increased cost-effectiveness, time-savings, process automation and other benefits for both recruiters and job hunters.

The Latin America region is projected to grow at the fastest CAGR of 9.1% reaching the value of $3.8 billion by 2025.

Major competitors that provide recruitment services in Russia and the CIS include:

• SuperJob.ru

• Zarplata.ru

• Rabota.ru

• Avito

Source: Sentieo

Management believes HHR’s customer and user bases to be its key advantages in the online recruitment market.

Financial Performance

HHR’s recent financial results can be summarized as follows:

• Reasonably strong growth in topline revenue

• Increased operating profit and operating margin

• Growing EBITDA but reduced EBITDA margin

• Increased comprehensive income

• Growing cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2018	$ 91,766,595	29.3%
2017	$ 70,988,085
Operating Profit (Loss)
Period	Operating Profit (Loss)	% Variance vs. Prior
2018	$ 31,481,730	51.8%
2017	$ 20,745,030
Operating Margin
Period	Operating Margin
2018	34.31%
2017	29.22%
EBITDA
Period	EBITDA	EBITDA Margin
2018	$ 31,928,670	34.8%
2017	$ 27,663,990	39.0%
Comprehensive Income (Loss)
Period	Comprehensive Income (Loss)
2018	$ 15,870,750
2017	$ 7,763,655
Cash Flow From Operations
Period	Cash Flow From Operations
2018	$ 31,450,320
2017	$ 23,884,230

Click to enlarge

Sources: Company registration statement and IPO Edge

As of December 31, 2018, the company had $42.9 million in cash and $155.0 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2018, was $29.7 million. (All figures IFRS accounting standards).

IPO Details & Valuation Metrics

HHR intends to sell 16.3 ADSs at a midpoint price of $12.25 per ADS to raise $200 million in gross proceeds from an IPO, not including customary underwriter options.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $667 million.

The company says it plans to distribute 50% of its Adjusted Net Income as a dividend but didn’t provide a projected amount. Additionally, the firm requires the prior written consent of VTB Bank, subject to numerous exceptions.

Per the firm’s filing, it will not receive any proceeds from the IPO; rather the selling shareholders, which are the 5% or greater shareholders in the company, will receive all the proceeds.

Management’s presentation of the company roadshow is not available.

Listed underwriters of the IPO are Morgan Stanley, Goldman Sachs, Credit Suisse, VTB Capital, Sberbank CIB, and BofA Merrill Lynch.

Below is a table of relevant capitalization and valuation metrics for the firm:

Measure [TTM]	Amount
Market Capitalization at IPO	$612,500,000
Enterprise Value	$666,589,325
Price / Sales	6.67
EV / Revenue	7.26
EV / EBITDA	20.88
Earnings Per Share	$0.30
Total Debt To Equity	3.44
Float To Outstanding Shares Ratio	32.61%
Proposed IPO Midpoint Price per Share	$12.25
Net Free Cash Flow	$29,651,190
Revenue Growth Rate	29.27%

Click to enlarge

Sources: Company registration statement and IPO Edge

Expected IPO Pricing Date: May 8, 2019.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.