Shift To Pay Per Click Model Will Increase Future Operational Efficiency

Key Takeaways

• The shift to a Pay Per Click model and small-scale innovations are poised to enhance revenue growth and platform efficiency.
  
• Integration of business segments and technological efficiencies may boost operational efficiency, net margins, and international revenue prospects.
  
• Uncertain global market conditions and challenges in transitioning business models may hinder revenue growth and profitability, impacting financial stability and future investments.

Catalysts

Provides HR technology and business solutions that transforms the world of work.

• Recruit Holdings is undergoing a shift from a Pay Per Post (PPP) to a Pay Per Click (PPC) advertising model with Indeed PLUS, which could drive future revenue growth by increasing the efficiency and effectiveness of their job ad platform.
  
• The integration of business segments, particularly HR Solutions into HR Technology, aims to enhance service offerings and operational efficiencies that could positively impact net margins and accelerate earnings growth.
  
• Recruit is facilitating small-scale tests and innovations that have resulted in an increase in revenue per paid job ad, which may lead to an overall increase in revenue growth as these innovations are refined and expanded.
  
• The accelerated share buyback program, with approximately 80% of ¥600 billion already utilized, is expected to complete earlier than anticipated, potentially providing a boost to EPS by reducing the number of shares outstanding.
  
• Planned technological integration and efficiency improvements in the Placement business, utilizing Indeed’s matching technologies, could enhance operational efficiency and drive revenue growth in both Japan and potentially international markets.

Recruit Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Recruit Holdings's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.3% today to 12.8% in 3 years time.
• Analysts expect earnings to reach ¥517.8 billion (and earnings per share of ¥366.07) by about December 2027, up from ¥363.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥652.6 billion in earnings, and the most bearish expecting ¥436.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.6x on those 2027 earnings, down from 45.2x today. This future PE is greater than the current PE for the JP Professional Services industry at 25.0x.
• Analysts expect the number of shares outstanding to decline by 1.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.72%, as per the Simply Wall St company report.

Recruit Holdings Future Earnings Per Share Growth

Risks

• The decline in the number of job postings in the U.S. labor market, combined with the uncertainty about the timing of recovery, could negatively impact revenue growth and profitability in the HR technology segment.
  
• The slower-than-expected transition to Indeed PLUS and the challenges in shifting clients from PPP to PPC models in Japan suggest potential risks to revenue and margins.
  
• The decreasing net cash and deposits due to significant share buybacks reduces the cash reserve, which could impact future growth investments and financial stability.
  
• Challenges in convincing advertising agencies and clients to adopt new models in Japan's HR Solutions may lead to slower revenue growth and a potential increase in marketing costs to drive adoption.
  
• The uncertainty in global markets, such as the lack of improvement in business environments in Europe, the U.S., and Australia, could offset revenue growth from Japan, impacting overall earnings stability.

Valuation

• The analysts have a consensus price target of ¥10407.69 for Recruit Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥12600.0, and the most bearish reporting a price target of just ¥7300.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥4034.5 billion, earnings will come to ¥517.8 billion, and it would be trading on a PE ratio of 32.6x, assuming you use a discount rate of 4.7%.
• Given the current share price of ¥11080.0, the analyst's price target of ¥10407.69 is 6.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.