Friday, April 20, 2012

Recruit holdings (0550 HK)

Similarly, I wrote this in 2011s and was unable to take action due to the partly some convoluted paper process to apply from my country to this counter in Hong Kong and the various fees involved (broker quoted) . Will T reminded me that this would have done very very well.

*** Please be reminded the numbers and situation to this firm have change and is outdated.

(All in HK $)
Businesses Background 
  1. Printing services 
  • Prints educational, lifestyle books for publishers and presses, 7th largest intl exporter to US
  1. In-flight magazine advertising
  • Only HK listed firm working with 4 largest China airlines and one in Taiwan, leader in China
  • Global in flight airline ads revenue worth US$1 billion in 2006, probably US$2 billion now assuming 15% growth per year. So with $616m or US$79 million revenue, its about 4% of global market share. A journal also mentioned Asia taking 30% market share, and China is probably internal flights + some externals, so I would think its around a fifth of Asia's total air traffic so that works out to be 6% of global market share. So 4-6% is feasible.
  1. Recruitment magazine advertising
  • 2010 return to profitability - likely further shrinkage with shift to internet model
  • Carve-out of printing business, Recruit will hold 57.98% post event (at least 50%) 
  • 25 Feb, PN15 submission approval granted and 18 Mar, PGL submitted listing applications
  • IPO and share placemen of PGL, after which spin off preferential PGL to shareholders   
  • Parent price at
  •  $2.70, 311.71m shares = mkt cap $840m, PE of 4.9x, PB of 1.7x
  • In 2010, firm earned $169.5m/ $319.2m (net/ gross profit) over $1152.5m of revenue 
  • In 2009, firm earned $92.8/ $208.1m  (net / gross profit) over $698m of revenue 
  • CAGR growth of over 27/ 24% for revenue / profit resp.
  • S/D costs went up $76 to $110m (44%) as the most significant impact to P&L
  • Net cash is approx $100m, including financial derivatives and investments 
  • Trade receivables went from $224.2 to 340.3m while payables 138.8 to 128.7m (2009 to10)
  • SH equity stands at $495.5m, firm earned $77/ 50m of FCF
  • Segmental results (2009/2010)
  • Advertising 
  • Revenue $243.7/ 616.6m, profit $47.5/ 122.3m 
  • Assets $171.1/ 218.65m, liabilities $69.8/ 65.93m, net  $101.33/ 152.723m
  • Printing 
  • Revenue $454.3/ 534.9 m, $66.7/ 74.0m profit 
  • Assets $411.54/ 483.67 m, $71.1/ 67.7 liabilities m, net $340.435/ 415.978 m
  • March 2009, spin off Cinderella Media scrapped. (I.e travel advertising too good to give up!)
  • The long range price is $2.20-28 so if carve-out fails, a likely immediate loss of 18.5 - 21.4 % 
  • 4 hurdles to be cleared are, shareholders (check), both firm's board and listing approval
  • The advertising is asset light and more efficient in generating profits
  • RONA 2009/2010 is 46.8/ 80% for advertising versus printing of 19.5%/ 17.7%
  • Valuations
  • The closest competitors trade 7-9x PE but growth and ROE/ROA are not as good or even negative
  • A recent outdoor advertiser was listed on HKSE for 10x PE
  1. Printing business (slowing growth, lower ROA)
  • Valued at lower of 5-6x PE or 1x PB
  • With normalized profits of $70mm and net assets of $415m, = value of $350-420mm
  • Recruit once subscribed for 4.18% (407.273mm shares)of PGL at $0.30 through conversion of loan to equity
  • That values entire PGL at $2,923mm. Whilst this figure is off as it is a conversion instead of a cash payout, we believe management remains optimistic on the value of PGL
  1. Advertising business (fast growth and grows 20-30% p.a, higher ROA)
  • With a PE range of 10x
  • Normalised profits of $100mm = value of $1,000mm
  • With fast growth, higher PE of 12-15x plausible but pegged it at the lower range
  1. Combined entity 
  • Total value $1350 - 1420mm 
  • If purchased now, you will still get the printing business for free!
  1. EXPECTATIONS
  • Expect the combined entity to trade at conservatively $1350 - 1420
  • Possibly higher if the advertising business takes off
  • Represents a conservatively possible 60 - 69% return 
  • The IPO and spin off is positive for the parent, Recruit as:
  • Parents gets cash for the IPO listing, possibly for expansion of new businesses
  • The ads business is asset light and with little depreciation, the solid earnings will be visible
  • Possible acquisition candidate due to strong balance sheet and phenomenal growth
  • A higher re-rating of the business is highly likely 
  • Fears of ending of airline ad contracts may be alleviated as logically, a 5+5 year extended contract duration is feasible (since they are the market leader) and hence a minimum of 10x PE is definitely reasonable. Every new contract hereon adds to the $100m profit
  • The IPO and spin off is positive for the subsidiary PGL as:
  • More understanding to the firm = more demand
  • Shareholders get less of the free spin off = less pressure selling = more stable pricing
  • Parent retains over 57% ownership, giving more upside potential for PGL
  • PGL executives incentives are more aligned to the performance of PGL
  • Other positives 
  • Insiders are taking part (Stock incentives and buybacks recently)
  • one of them an ex JCDecaux staff 
  • In 2009, the printing business raised sales by 36% while overall export market dipped 10% with 20% excess production capacity 
  • Management foresaw publishers will reduce suppliers to maintain bargaining clout
  • Competent management able to manage paper prices and fx exposures
  • One of the most solid balance sheet and profitable presses in the print industry 
  • Institutions typically buy in post spin off due to risk mgmt and trouble of selling subsidiaries
  • Spin offs take on average 6-12mths to happen from announcement and 1 year to realize value in a study conducted by Penn State in 1990s


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