Recruit Holdings: Exposure To Fast-Growing Glassdoor And Indeed

Summary

• Two of the most well-known global HR sites, Indeed and Glassdoor, are subsidiaries of Recruit Holdings of Japan. Both are reported under the HR Technology business segment.
• Both businesses have an impressive 30%-50% YoY revenue growth with a double-digit EBITDA margin.
• Having made up 13% of Recruit's ¥2.3 trillion (~$20 billion) revenue in 2019, Indeed and Glassdoor increasingly look like the future of Recruit's business.

Overview

Founded in Japan over 55 years ago, Recruit Holdings (OTCMKTS: OTCPK:RCRUY) (JPX: 6098) is the largest HR (Human Resources) company in Japan. We believe the stock presents an attractive investment opportunity due to its strong growth and profitability, driven by its fast-growing HR technology and profitable staffing and media businesses. We believe that Recruit will continue to benefit from its ownership in Indeed.com and Glassdoor.com, two US-based HR technology companies with strong market share, growth, and brand presence. In our view, both companies are the future of Recruit's business. Furthermore, their resiliences have also helped Recruit weather the pandemic. The stock is currently trading at ¥3,818 (~$35) per share, down by ~15% from YTD-high, given the COVID-19 situation that has modestly impacted its core staffing and media businesses. We think that the current price level provides a good entry point, and as such, we will maintain our overweight rating on the stock.

Catalyst

Glassdoor and Indeed are both fast-growing and profitable businesses with attractive long-term prospects. Recruit acquired Indeed in 2012 and Glassdoor in 2018 for $1.2 billion in cash. So far, the business units, which are consolidated under the HR Technology segment, have been delivering outperformance for Recruit. The HR technology is the newer business segment in Recruit, whose core business has been in staffing. Along with the media business, staffing provides a steady revenue and profitability. With ~¥1.3 trillion of revenue, staffing still makes up over half of the Recruit’s business. The media makes up ~30% of the business and is the most profitable segment with a ~23% EBITDA margin as of FY 2018. While revenues for staffing and media have relatively been flat YoY, the HR technology segment has been fastest-growing.

(source: Recruit’s 2019 annual report)

In the 2018 fiscal year ending March 31, 2019 (FY 2018), the HR technology segment made up over 13% of Recruit’s business with the ~¥327 billion (~$2.9 billion) of revenue, up ~50% YoY. The profitability was even more impressive, given the exceptional 55% YoY EBITDA growth in FY 2018. Given the accelerating growth, HR technology is on track to make up 20% - 30% of Recruit business in the next two or three years, and potentially half of the business in the next five.

Both businesses have been very resilient during the pandemic. Recruit has generated ~¥300 - ¥500 billions of OCF (Operating Cash Flows) annually in recent times, which is used to offset the repayment of its debts and investment activities. The pandemic, however, will potentially delay payments and reduce cash-flow generation from the core business this year. In that sense, though Recruit is already a cash-rich business, Glassdoor and Indeed resilience will help greatly in weathering the storm that has disrupted its core staffing business.

(source: company's FY 2019 report)

As revenues from media and staffing businesses decreased by 0.4% and 2.1% YoY in Q4 2019 (three months ended March 2020) as the pandemic hit globally, HR technology instead grew by ~18% YoY. In Q4, the outperformance has enabled Recruit to drive 26.3% growth in OCF during the challenging situation.

(Glassdoor.com traffic. source: similarweb)

The strong brand reputations of both businesses have also helped maintain traffic consistency. Both Indeed and Glassdoor sites had over 350 million monthly total visits globally as of May, with the review site Glassdoor having a relatively softer decline in the last three months ending in April than that of Indeed, the job portal platform. These declines were consistent with the timeline of COVID-19 lockdown and furloughs we have seen across the industries globally.

(indeed.com traffic. source: similarweb)

With that in mind, we think it is quite impressive that the segment still delivered a solid 18% YoY growth in Q4. As the overall traffic bottomed around April and began to rise in May, we see a positive sign that the job market will be improving in the near term as some countries plan to reopen.

Risk

In our view, the staffing business will potentially see a longer recovery time than the HR technology. Staffing business primarily offers temporary staffing services across clerical, manufacturing, or light industries, whose demand for labor may not be too critical, considering that production is unlikely to peak anytime soon.

Valuation

Considering the exposure to the fast-growing Glassdoor and Indeed within the HR technology segment, we believe that Recruit’s 2.6x P/S is quite attractive. Both businesses have been the growth drivers for Recruit and proven to be resilient as well. In FY 2019, HR technology grew by 30% while media only grew 4.8%. Staffing revenue even declined by 3.3% YoY. In that sense, an investment in Recruit is a long-term bet on its HR technology business.

(6098.T, Recruit Holdings. source: yahoo finance)

Considering the near-term uncertainty, it would be challenging to foresee where the stock may land towards the end of the year. As the company has been consistent in maintaining consistent EBITDA growth, it may maintain its FY 2019 EPS of ~¥121 this year, assuming no EPS growth under the most conservative scenario. With a P/E of ~35x, we set a price target of ¥4,235 and maintain our overweight rating on the stock.

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.

Comments

[Icepick11]

Interesting company.