HRnetgroup - RHB Invest 2017-11-14: Superb 3Q17 With Upcoming M&A Spree

HRnetgroup - RHB Invest 2017-11-14: Superb 3Q17 With Upcoming M&A Spree HRNETGROUP LIMITED CHZ.SI

HRnetgroup - Superb 3Q17 With Upcoming M&A Spree

  • HRnetgroup reported a strong set of 3Q17 results, with PATMI surging 20.2% YoY to SGD10.7m, reflecting stronger flexible staffing in Singapore and the 88GLOW scheme taking effect. 
  • Going forward, we expect its strong performance to continue in 4Q17, as events during Christmas and New Year would boost the number of temporary jobs available. 
  • With the first MOU announced and SGD280m of net cash, we expect more acquisitions to follow in 1Q18 and 2Q18. 
  • Maintain BUY with an unchanged DCF-derived TP of SGD1.14 (30% upside).

Strong contributions from flexible staffing in Singapore. 

  • HRnetgroup’s positive 3Q17 results largely reflected strong growth at its flexible staffing business in Singapore, as well as full contributions from the 88GLOW scheme.
  • We expect the strong growth in flexible staffing to continue going into 4Q17, due to major events like Christmas and New Year.

Moving back into Indonesia. 

  • HRnetgroup announced that it entered into a binding term sheet with PT Rimbun Job agency for the proposed establishment of a new brand – HRnet Rimbun – to provide professional recruitment services in Jakarta, Indonesia. 
  • It will incorporate a new joint venture (JV) to acquire the existing professional recruitment business of Rimbun Job (which commenced operations in 2007) for a consideration – this has not yet been finalised. The shareholders of Rimbun Job have undertaken to remain employees of the JV company for at least three years. We expect this acquisition to be completed by 1Q18.

Ready for acquisition spree with net cash of SGD280m. 

  • With a net cash hoard of SGD280m, coupled with SGD15-20m of free cash flows a year and low capex requirements, we believe the company is well positioned to go on an acquisition spree. Management has expressed interest in growing inorganically through acquisitions, especially in other parts of the world, with several nondisclosure agreements (NDAs) already signed.
  • We believe it would likely target recruitment firms that are specialised in a specific sector, which would further add an edge and niche to their existing profile. 
  • Management has already started with PT Rimbun Job and we think that there will be more, larger sized acquisitions to come, especially in 1Q18 and 2Q18. Assuming a budgeted SGD200m for acquisitions at an average P/E of 10x, HRnetgroup could potentially add another SGD20m (+50%) to its NPAT.

Positive signs point to a good 4Q17 and more incoming accretive acquisitions – Maintain BUY.

  • We believe HRnetgroup will likely make more acquisitions in the near future and focus on new markets which it is not yet entrenched in, like Japan, China, Australia and even Europe. We also expect a better 4Q17 ahead due to stronger growth in flexible staffing in Singapore. 
  • With a positive outlook ahead, we maintain our BUY call with an unchanged TP of SGD1.14. 
  • Key risks include increased competition and fluctuations in general economic activity.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-14
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.140 Same 1.140