HeadHunter - Quarantined Business Activity Triggers Downgrade

We downgrade HeadHunter (HH) to HOLD and reduce our target price by 15% to $16.73 per ADR as we have lowered our forecasts in light of the extended quarantine measures, which will now have a much larger detrimental impact on economic activity than we had originally expected.> What has changed since our March 17 report. The IMF has updated its forecasts and now expects global GDP to shrink 3% this year (down from 3.4% growth expected previously) and the Russian economy to contract 5.5%. Our economists do not rule out such a scenario, particularly given that the quarantine measures have been extended and could be prolonged into May as well. Russia announced quarantine measures on March 28, though many businesses managed to arrange for employees to work remotely one or two weeks before this. The quarantine measures will be place until April 30, though First Deputy Prime Minister Tatiana Golikova has said that they are unlikely to be lifted until May 9. This would reduce the number of working days in 2Q20 by 41% y-o-y (and by 11% in 2020). If we assume that these measures are extended until end-May, the respective numbers would be 64% and 16%. Many small businesses are de facto closed; this was HH's largest segment (54% of the total) and the fastest growing (+32% y-o-y) in 2019. Key accounts (+54% and +18%, respectively) are now unlikely to be hiring and have likely frozen headcounts and started to optimize staff.> What we now expect in 2020-21. Assuming that the quarantine measures are extended until May 11, we expect HH's revenues to drop 11% to R7 bln in 2020 (but recover by 47% to R10.3 bln in 2021). The most resilient segment would be subscription (-1% and +30%, respectively), while the job posting segment would be higher beta (-17% and +66%). In terms of client type, key accounts should be more resilient (+1% and +21%) than SME (-17% and +62%). Recall that HH introduced price hikes in the high single to low double digits percent in 2020. We expect adjusted EBITDA to slide 10% to R3.4 bln in 2020 (with the margin easing 1.5 pp to 49%) and recover by 47% to R5.9 bln in 2021 (with the margin climbing 8.5 pp to 57.4%). HH should be able to optimize personnel expenses (we project 10% growth in 2020 versus 30% growth in 2019) as a substantial part is performance based for sales staff (sales staff represented 20% of personnel costs in 2019). It could also save on marketing expenses (we expect a drop of 35% given declining advertising prices and strong brand awareness than could allow it to optimize placements) and other expenses, including travel costs. > HH just withdraw its previous 2020 guidance and deferred payment of dividend. The dividend payment of $0.5 is deferred until further notice, while the amount of the dividend as well as the dividend record date of March 27, 2020 will remain unchanged. The company plans to provide an update when it reports its 1Q20 results, which we expect around May 20. It intends to provide additional details about the financial guidance for 2020 as soon as there is greater clarity on the impact of Covid-19 on the business and the broader Russian economy. > How HH is positioned versus the competition. We reiterate our view that in tough times, recruitment budgets tend to consolidate around the market leader, which is able to provide the best efficiency and lower cost per unique contact rather than budgets being split among several players as often happens in better times. HH increased its brand awareness in 2019 to 55%, according to Socis MR Russia, while the gap to the No 2 two player (Avito) expanded to 2.9-fold from 1.7 the year before. We also continue to expect disruption to offline blue-collar recruitment (still around 50% of the total) by online and see HH as one of the key beneficiaries of this trend thanks to its market dominance and increased focus on this business line. The employee turnover rate in Russia is quite high, at 37.2% for blue-collar and 14.9% for white-collar staff, according to J'son & Partners. This means that once the quarantine measures are lifted, companies will resume hiring despite the expected downturn. The internet (and HH) provides a cheaper alternative for this hiring than offline channels. > Valuation. We downgrade HH to HOLD and our reduce target price by 15% to $16.73 per share due to our lower forecasts. HH is trading at an EV/EBITDA of 21 for 2020E and 11.6 for 2021E and a P/E of 32.1 for 2020E and 16.7 for 2021E, representing a discount of 17% on 2021E EV/EBITDA and 58% on 2021E P/E to DM classifieds peers. We expect adjusted EBITDA to grow at a CAGR of 29% over 2019-22, with adjusted net income expanding at a 38% CAGR and FCF at a 35% CAGR.