House of HR - Smoke vs. Fire - Model Update
All,
Please find our updated analysis on House of HR here.
The pandemic, online migration, tariffs, AI and oil prices all have one thing in common: They impact House of HR. Staffing companies are notoriously pro-cyclical, and the listed peers in the industry only document how quickly volumes and prices can move in unison against investors. However, a historical look into the company itself and adjusted for an acquisition last year, House of HR has wobbled relatively little, suggesting the market is seeing more smoke than fire. What, if anything, does that say for the future and what risk are investors taking when betting on 14% YTM into an orderly refinancing before 2028?
Investment Considerations:
- We are holding our 4% of NAV position in the SSNs for now and will be waiting for a little more progress towards refinancing before we add to it. The E&C swallow on which we bought the bonds at 92c/€ going into Q425 did not yet a spring make. The division is taking longer to turn around, narrowing the path to refinancing to an internal cost exercise, rather than mere price/volume growth.
- We take comfort from the overall EV coverage of the SSNs at approx. 1.3x without cash, and on the current trajectory, liquidity remains stable. So we are earning a 10% running yield for a stable, if high-beta pro cyclical position with an option of making €14% if internal leavers pull (largely under management control).
- On the downside, we don't think AI is going to be a headwind between now and refinancing, given initial studies suggest the opposite. However, we have not yet seen the impact of the Iran war and considering the late-cycle nature of E&C, this may take longer to unfold. But we'd prefer to replicate the Iran trade in oil directly, instead of in staffing companies.
- The above downside case (Key Credit Stats) is draconian. At no point since the pandemic has this company seen revenues collapse (consider that Q1 is up 2.6% LfL in aggregate already).
- The structure allows for significant baskets that management could use to bolster liquidity if its continued M&A strategy and the current cash burn erode the likely limited liquidity headroom today.
- HoHR is a good company in a growth industry with a big balance sheet and runway. It is structurally weaker than its larger rivals, but relatively protected within its niche. We are confident that management can turn around the E&C bench and sickness rates by the end of 2027, and there is upside from improving the Care Ratio too.
Key Conclusions:
- STS is stabilising at c.3% LfL growth, but E&C remains under pressure from persistently weak volumes and delayed cyclical recovery. We now assume no meaningful improvement in E&C before 2028, which extends the turnaround phase and shifts the refinancing narrative away from top-line expansion towards cost discipline, and ratio optimisation across the group (Current Trading).
- In our base case, House of HR requires c.2-3% annual consolidated revenue growth sustained through the cycle, together with a 1pp structural margin improvement. To secure a refinancing at maturity, the company needs to realise (and not pass on to the market) a c.€25m EBITDA uplift from AI-driven improvements in Care Ratio by approx. 0.5 FTEs, which would bring performance closer to their 2022 levels again. The company is broadly on its way, and the refinancing path remains open, but margin for error has narrowed (Current Trading, Model).
- A potential €25m Care Ratio improvement is credible in light of 2022 levels, but we are concerned they will have to be passed on to the market if peers do the same (Current Trading, Model).
- Staffing remains highly cyclical. However, House of HR’s multi-niche positioning, decentralised model, high-touch customer relationships provide relative resilience in this macro environment (Model).
- The industry characteristic 70% variable cost structure, while protective in downturns, also limits operating leverage in recovery phases, diluting incremental margin expansion. As a result, the company requires sustained and relatively uninterrupted growth to improve leverage metrics meaningfully, and any renewed slowdown would quickly increase refinancing risk (Model).
- We have reduced our forecast as the E&C division is now expected to bottom later and recover more gradually than previously modelled, reflecting sustained volume pressure and partial uncertainty over how much relates to cyclical versus structural factors (including Dutch equal pay legislation). Our EV estimate is now c.€200m lower than prior assumptions (Model, Valuation).
- Our DCF assumes STS growth of c.3% throughout, negative to flat E&C development through 2027 before a recovery to c.3% growth in 2028, and a 1pp margin uplift driven by scale and mix effects. It incorporates catch-up tax payments in 2026–27 and ongoing annual cash charges of c.€35m, while explicitly excluding a €25m contribution from AI efficiency improving the Care Ratio (Valuation).
- Peer valuations point to a 7.0x IFRS 16 EBITDA trading multiple, down 1.0x since December, reflecting weaker macro sentiment and increased concerns around AI-driven substitution risk in staffing models. At the same time, first studies suggest that swift AI implementation is rather a driver of consulting revenues - at least in the short term. This tallies with the company's efforts to fund AI education for its workforce. Meanwhile, House of HR’s apparent operational resilience supports a modest narrowing of its peer discount to -1.5x (Valuation).
Moving Parts:
- Staffing is a growth industry. Once Europe works through its soft consumer demand, then tariff, then AI and then oil uncertainties, the demand for temporary staffing and consulting projects will return.
- House of HR has been stabilising on an aggregate basis. To refinance, it has to at stabilise its E&C division, for which we now allocate ample time of 21 months. All else equal, that should expand margins by approx. 1ppt from better bench rates. If on top of that management find another €25m of savings from improving its Care Ratio (looks achievable), then the refinancing is within reach, and the 14% YTM on the SSNs look attractive. Even without the improved Care Ratio, the 2LNs are 2x value covered if the company only continues as it currently does. The SSNs have no debt layer ahead of them (yet).
- The path to refinancing is narrow. If performance drops one more time (the industry is highly pro-cyclical, so: If another macro headwind emerges...), it's out of reach. Ratings will drop into CCC territory if they won't do so already (Moody's to finalise soon), and the focus will shift to the complex owner/sponsor/staff shareholder structure that may have to clear internal differences before providing any support (if that's even the aim). The high-touch client relationships, multi-niche focus and 70% variable cost structure will mitigate the drop, but margins and volumes can collapse simultaneously.
- Our legal analysis suggests a path for a drop-down that would allow up to €900m of gross assets to leave the restricted group, if accompanied by a non-pro rata proposal to existing creditors. That would be a sizeable proposal and would have to land with both the TLB and the bonds. We are doing more work on this scenario.
Looking forward to discussing this name with you. Together with Hogan Lovells, we are holding a call on LME scenarios on Wednesday, the 20th of May, in which we will feature House of HR.
Wolfgang