HRNetGroup Ltd (HRNET SP) - DBS Research 2018-02-26: Awaiting Acquisition Catalyst

HRNETGROUP LIMITED CHZ.SI

HRNetGroup Ltd (HRNET SP) - Awaiting Acquisition Catalyst

HRNetGroup's 4Q17/FY17 results within expectations.
Final DPS of 2.3 Scts proposed, 50% PAT payout ratio.
Higher proportion of productive headcount partially offset by contraction in sales staff strength.
Key catalyst: Accretive material acquisitions to utilise cash hoard amounting to ~35% of market cap.

HRnetGroup’s 4Q17/FY17 results were within expectations. Net profit for 4Q17 and FY17 were at S$12.2m and S$41.3m, up by 22% and 0.6% y-o-y respectively.
Revenue and gross profit for FY17 ended at S$391.9m and S$136m, an increase of 7.4% and 2.4% respectively from a year ago.

A final dividend of 2.3 Scts has been proposed, amounting to about 50% payout ratio of profit after tax.

The improvement in revenue was largely driven by its Flexible Staffing segment, which saw revenue and gross profit increasing by 10% and 9.2% y-o-y to S$301.9m and S$46.6m respectively. The group saw an increase in the average number of contractor employees at 11,300, up from 10,500 in FY16.

Professional Recruitment segment on the other hand saw a marginal dip of 1.1% in gross profit to S$86.7m, as a result of lower permanent placements of 8,200 in FY17, down from about 8,500 in FY16. That said, the average gross profit per placement inched up slightly by c.3% to S$10,500, from S$10,200 in FY16.

The group’s total permanent staff strength stood at 809 as at December 2017, down from 838 as at end-December 2016. Total sales staff headcount dropped by 29 to 694 as at December 2017, from 723 a year earlier.
Despite the contraction, total productive headcount (PHC – sales staff achieving gross profit more than three times their basic salary) improved to 66% of total sales headcount (FY16: 63%). Gross profit per sales employee improved by 5.4% to S$195,700 in FY17, up from S$185,700 in FY16.

The company continues to evaluate acquisition opportunities, and has announced a couple thus far – PT Rimbun, investment in Glints, and REForce (currently undergoing due diligence).

We retain our BUY recommendation, as we believe the labour market has bottomed in Singapore, going by our economist’s reading of the growth in the service sector. This should bode well for recruitment firms like HRnet.
Furthermore, the utilisation of its current cash balance, of which a large part arose from its IPO concluded in mid-2017, could serve as a share price catalyst for the counter.
Our Target Price is adjusted marginally to S$0.97 on the back of a higher estimated cash hoard. We have based our Target Price on 15x ex-cash FY18F EPS, coupled with the average cash of S$297m (FY17/18F). At its current price, HRnet trades at an estimated 11.4x FY18F ex-cash PE, which is at a steep discount to peers’ average.
Key risks:
1. Departure of sales staff/productive staff leading to loss of business;
2. downturn in economy;
3. relatively low liquidity of counter which could see share price swings.

Andy SIM CFA DBS Vickers | Alfie YEO DBS Vickers | http://www.dbsvickers.com/ 2018-02-26

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.97 Up 0.960