HeadHunter Group Grows But Headwinds Gather (NASDAQ:HHR)


Quick Take

HeadHunter Group (HHR) went public in May 2019, raising $220 million from the sale of its ADSs in the U.S.

The firm operates an online employee recruiting portal in Russia and the Commonwealth of Independent States.

HHR produced revenue growth in 2019 but is exposed to the negative effects of the Covid19 pandemic combined with low oil prices on the Russian economy.

My bias on the stock is Neutral through the end of 2020 or until the Russian economic picture brightens.

Company

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:

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:

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

Recent Performance

HHR’s topline revenue by quarter has grown over the most recent five-quarter period, with Q4 2019’s results a 38% growth over the previous year’s same period:

Gross profit by quarter has grown along a mostly similar trajectory:

Operating income by quarter has reached a five-quarter high of $15.4 million:

Earnings per share (Diluted) have been uneven but near its five-quarter high in Q4 2019:

Source for chart data: Seeking Alpha

Since its IPO, HHR’s stock price has risen 0.23 percent vs. the U.S. Professional Services index’ fall of 3.2 percent and the overall U.S. market’s fall of 6.2 percent, as the chart below indicates:

Source: Simply Wall Street

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure

Amount

Market Capitalization

$832,500,000

Enterprise Value

$886,680,000

Price / Sales

6.63

Enterprise Value / Sales

7.07

Enterprise Value / EBITDA

15.63

Free Cash Flow [TTM]

$41,240,000

Revenue Growth Rate

27.31%

Earnings Per Share [FWD]

$0.71

Source: Company Financials

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming the above generous DCF parameters, the firm’s shares would be valued at approximately $17 versus the current price of $15.23, indicating they are potentially currently slightly undervalued, with the given earnings, growth and discount rate assumptions of the DCF.

Commentary

In its last earnings call in September 2019 for the period through Q2 2019, management highlighted the firm’s growth results despite an economic slowdown in Russia.

Since then, Russia has continued to experience economic challenges, growing only 1.3% in 2019, the weakest annual growth since 2016.

With the fall of oil prices and the effects of the coronavirus, the Russian economy, which accounts for most of HHR’s revenue, is likely to face a significant contraction in 2020, presaging a similar contraction in HHR’s employment services.

HHR management says that its platform is the ‘number one online recruiting platform’ in Russia.

As to its financial results, revenue grew 26% in 2019 primarily from small and medium sized accounts and growth of key account monetization. Adjusted EBITDA margin grew from 48% to 52%.

Operational cash flow increased to $42.1 million for 2019, a strong growth from the previous year’s $30.1 million result. 2019 finished with $33.7 million in cash and equivalents.

The firm was able to increase prices successfully early in 2019 and received 52% of its revenue in the form of subscriptions, a smoothing effect over time.

Unfortunately, since the beginning of 2019, the ruble has fallen against the dollar by 12.5%, a headwind risk for dollar based shareholders as the firm doesn’t appear to hedge its currency exposure.

The challenge for HHR is that since it is primarily concentrated in Russia, as goes Russia, so goes HHR to a significant degree.

While the stock has bounced back from a 50% selloff, the Russian economy is likely to shed jobs to a large degree in the months ahead, from the coronavirus pandemic as well as the bruising oil price war with Saudi Arabia.

Despite a recent supply deal, some industry observers believe it is only temporary, and the oil price war will restart again in the near-term, harming Russia’s economic prospects in the process, and by extension, HHR’s.

While the DCF indicates the stock may be undervalued, that assumes a continued reasonably strong revenue growth trajectory, which may not manifest for the rest of 2020 and into 2021.

So, my bias on the stock is currently Neutral due to external economic challenges in Russia. As those abate, HHR’s fortunes may rise.

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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.

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