House of HR - What we were looking for - Model Update - Positioning
All,
Please find our updated analysis on House of HR here.
HoHR has effectively no tangible assets in a sector that has shown significant volatility in 2025. In addition, HoHR has a Q225 acquisition to digest, which is obscuring its financial performance, and an accruing 2LN PIK-Toggle Loan structure that is making this name less popular than it should be. But we expect to be largely through the nadir of the crisis, and are ready to take a directional bet where up- and downside are perhaps equally likely, but the upside looks a lot more probable.
Investment Considerations:
- We are buying 4% of NAV in the SSNs at 92c/€ on the premise that the company is turning around and that liquidity will be sufficient through the turnaround. Whether or not this is the exact right timing is difficult to say. On the one hand, we see Q4 as materially deleveragingin LTM. On the other hand, the entire sector has been trading down and may not be finished. So we are leaving some dry powder to buy more in a quarter or two. We have slightly raised our projections for HoHR and consider the estimated liquidity headroom of €100m sufficient in the meantime. We expect the bonds to tighten back to par or call levels over the year, which should provide us with a 20% IRR.
- HoHR being a slow-moving business of ratios, we do not anticipate further headwinds that would hold up the turnaround and bottoming out of its STS and E&C divisions, respectively. When we initiated on this name in August '25, the bonds traded at 102c/€, which we considered call constraint and not convex enough for a turnaround that was still not evidenced. Now that the business is stabilising and bonds are 10 points cheaper with 11% YTM while deeply value covered, we consider this a good entry point.
- Were the bonds thrown into serious doubt, the entire sector has been struggling through this period; a widening to even 15% YTM would provide just under 10 points of risk. We think it's unlikely.
- 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 bench and sickness rates within approx. a year and a half, however, recovery beyond that will have to come from a better macro and geopolitical environment.
Key Conclusions:
- Following a cyclical downturn, rather than secular headwinds, STS revenues have turned around, but the more discretionary E&C revenues are only just stabilising, with positive LfLs not expected before H1 2026. Sickness ratio and bench rate are improving sequentially, but still higher YoY (in line with peers). The care ratio is better than ever. Cost headwinds linger in the STS division due to a change in NL regulation that requires equal pay and conditions for freelancers, compared to employees. Management see this effect annualise, but expect no further downdraft (Current Trading).
- We have slightly improved our forecast. Consequently, we now see 2026 closer to NCF flat for the year. Margin uplift from improving sickness and bench rates could add ~€20m, but this alone only should improve interest coverage by less than 0.2x (Driver).
- An additional ~€20m could come from revenue growth in 2026, turning NCF positive, though currently margin restoration holds more promise than revenue growth (Driver).
- HoHR has sufficient flexibility under its documentation to withstand this downturn for some time, and time is what HoHR has plenty of (Driver).
- Trading comps suggest ~10x IFRS 16 EBITDA. But taking into account HoHR’s small scale and lack of operating and branding synergies across Powerhouses, we discount by two turns to 8x, which is also backed by our DCF. Still, on that valuation, the 2LN is fully EV covered, even if the group remains at least theoretically overleveraged above €1.7bn of debt. (Valuation).
- The staffing market remains fragmented, with the top three players holding only ~15% and focusing on commoditised temp staffing; HoHR is close to #3 in the Netherlands and able to compete. In the medium-term, the sector faces disruption risk from online migration, but none of the players has thus far taken the medium to a point where it makes separate disclosures (Industry).
- HoHR maintains higher margins through its E&C division, but this segment is also highly cyclical. We don't know if the lack of integration across operations represents an unrealised opportunity or is simply impractical (Company).
Drivers:
- Staffing is a growth industry. Once Europe (the Netherlands) works through its soft consumer demand and tariff uncertainties, the demand for temporary staffing and consulting projects will return.
- Besides revenue growth, HoHR's two internal leavers are Bench Rate (proportion of consultants and specialised workers on out-placed projects) and Sickness Rate. A normalisation of both together should result in €50m of incremental EBITDA, due to the high proportion of variable cost in the business. The remainder would have to come from revenue growth, and the company has over three years before management should start addressing maturities. For reference, 1% revenue growth results in approx. 0.175x of incremental FCCR.
- Management cite defence hiring as a potential upside for demand in the near term and postulate that introducing AI would reduce cost and make its products more efficient. We are not debating it, but we don't need to rely on it to find the situation attractive as it is.
- Liquidity is probably tighter than meets the eye. Because the back-offices are not integrated between the company's PowerHouses and due to WC fluctuations (out in Q1 and in in Q4), minimum cash levels could be around €150m, leaving only €100m of true headroom - hence the drawn RCF.
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk