Recruit (6098) - No End to Earnings Volatility and Rich Valuations

Thao Nguyen here initiates on Recruit, explaining the business divisions, and highlighting and explaining the company’s fundamental strengths and weaknesses. Thao discusses Recruit’s strategies at home and abroad and assesses what these mean for earnings. There are plenty of interesting businesses developments that offer promise…but the returns are yet to be seen. A clear-eyed picture emerges. 

Founded in 1960, Recruit has been around long enough to accumulate expertise, weather some storms, secure a large user base and establish good relationships with clients. The company has achieved a leading position in many areas of recruitment and marketing media in the domestic market, while it has also been in search of sustainable growth; tapping into new businesses in Japan and overseas. Much of the company’s growth has been a result of M&A at home and abroad as it strives to fulfil its ambition of becoming a global leader in the field; this has resulted in volatility in Recruit’s profitability. While we believe in the long-term potential of the company, we acknowledge that this will continue to come at the expense of fluctuating shorter-term performance on the back of constant change in the Group’s company members and upfront investment initiatives. 

Key Points 

• Each and every segment of Recruit has substantial room for further growth in our view; not only in the domestic market – as the shift from offline to online services continues – but also in the overseas market, owing to value-enhancing M&As. 
• Initiatives in Japan to fuel further growth haven’t generated meaningful results; at the same time, they require investment to expand the user base before the monetisation stage can be reached. 
• The strategy in the overseas market has so far largely supported revenue growth while disrupting the profitability trend; and there is no guarantee that future M&As are successful. 
• While we are fairly optimistic about the company’s potential, we’re concerned about profit volatility over the medium term, which does not seem reflected in the premium valuation of over 20x EV/OP.