HRnetGroup Ltd - DBS Research 2018-05-10: A Good Start

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HRNETGROUP LIMITED SGX: CHZ

HRnetGroup Ltd - A Good Start 

• HRnetGroup's 1Q18 results within expectations. 
• Growth driven by both organic performance in Flexible Staffing and Professional Staffing, coupled with grants, absence of IPO expenses, interest income and lower MI. 
• Continuing its lookout for inorganic opportunities. 
• Maintain BUY, Target Price : S$0.98. 

Thesis: Riding on labour market recovery.

• We maintain our BUY recommendation for HRnetGroup as a beneficiary of the economic and labour market improvement. The counter is currently trading at 16.5x/15.8x FY18F/19F PE. 
• Excluding cash estimated on its balance sheet, PE (ex-cash) would be even lower at c.10.6x/10.1x our earnings estimates. 
• The institution of the group’s co-ownership model with its IPO has seen over 400 of its employees becoming shareholders. In our view, this aids in increasing motivation and bodes well for the group. 

Where we differ?

• We believe the labour market has bottomed in Singapore, going by our economist’s reading of the growth in the services sector. This should bode well for recruitment firms like HRnet. 
• Our forecasts are below consensus at this juncture but have possible upside pending further confirmation of improvements in subsequent quarters. 

Potential catalysts.

• Including the cash raised from its recent IPO, the group is currently sitting on c.S$292m cash (as of 31 March 2018), representing c.35% of its market cap. 
• Deployment of funds for inorganic and accretive acquisitions could further re-rate the counter. 

Valuation: 

• Our Target Price is adjusted slightly to S$0.98 due to a higher estimated cash balance. We peg our valuation at 15x on the ex-cash earnings in FY18F, coupled with estimated FY18F net cash balance of S$303m. 
• Our DCF model with WACC of 10% and terminal growth of 2.5% also implies a Target Price of S$0.98. 

Key Risks to Our View: 

• Downturn in economy leading to lower job turnover and opportunities, departure of team(s) of recruitment consultants and/or top management, competition, execution of inorganic growth opportunities particularly integration. 

WHAT’S NEW - A Good Start

HRnetGroup's 1Q18 figures within expectations.

• HRnetGroup's 1Q18 net profit surged by 46% y-o-y to S$16.3m, on the back of 12.2% and 11.3% improvement in revenue and gross profit to S$107m and S$36.4m, respectively.

Flexible Staffing and Professional Recruitment registered growth.

• Both these business segments helped in the growth in gross profit, though contribution from Flexible Staffing inched up to 35% (from 34%). Flexible Staffing’s gross profit grew by 15% y-o-y to S$12.8% (+$1.7m), of which $1.4m and $0.2m were contributed by Singapore and Hong Kong respectively. Professional Recruitment registered gross profit growth of 9.8% y-o-y (+$2m), contributed mainly by Hong Kong/China.
• In terms of geography, North Asia and Singapore registered increases of S$2.1m and S$1.5m respectively, and accounted for 40% and 57% of the group’s gross profit.

Net profit surged partly helped by several factors.

• Besides growth in the underlying operations, the surge in net profit was helped by:
  1. increase in government grants (~S$0.5m);
  2. revaluation of marketable securities (~S$0.8m);
  3. interest income (~S$0.5m);
  4. absence of IPO expenses (~S$0.9m);
  5. lower minority interests due to acquisition of interest during its IPO.
• Excluding the effects of lower minority interests (arising from GLOW88 scheme), net profit would have still registered a growth of 34.2% y-o-y to S$14.9m.

Productive headcount increase, though total headcount dipped slightly.

• Total permanent headcount dropped slightly to 791, from 820 a year ago. In 1Q18, there were 676 sales employees, down from 700 in 1Q17. 
• However, the number of productive sales employees increase by 25 to 473, from 448 a year earlier. As such, the group achieved a productive headcount (PHC) ratio of 70% in 1Q18, from 64% a year earlier (PHC ratio is defined as percentage of sales staff achieving three times gross profit over their respective fixed salaries).

1Q18 accounts for 34% of our forecasts, due to government grants.

• This set of results is tracking within expectations. Note that 1Q tends to contribute more to the full year given the recognition of government grants in the quarter, which will largely be absent in subsequent quarters. 
• We expect 2Q18 to continue to show strong growth y-o-y due to lower-base effects (due to IPO expenses last year) and lower MI (which came into effect only in 2H17). As such, we project growth normalising down barring significant acquisitions. 
• We are projecting a FY18F PATMI growth of c.16% to S$47.9m, a reversal of the 4.1% drop in FY17.

Revenue contribution by sector saw increase in “Others”.

• The group saw lower revenue contributions from almost all its main sectors, with the largest movements on “IT & Telecommunications” and “Manufacturing” ceding 3ppts to 16% and 13% respectively in 1Q18, compared to a year ago. This was picked up by “Others” which doubled its share to 20% from a year ago. 
• Management indicated that they saw a higher share from Professional services (e.g. audit, legal) and Education. We understand that this also partly explains its robust growth in Flexible Staffing gross profit.

Reviewing inorganic opportunities; well placed as balance sheet remains in net cash.

• Management indicated that they continue to pursue potential acquisitions but are unable to share more details at this juncture. Along with the current cashflow generation in 1Q18, the group's cash position improved to S$292m, up from S$289m as of end-December 2017. 
• Catalysts for the group include the deployment of cash for inorganic growth opportunities, and better-than-expected operational performance on the back of an improving employment market.

Maintain BUY, Target Price : S$0.98.

• We are maintaining our BUY recommendation as we view HRnetGroup as a beneficiary of the economic and labour market improvement. The counter is currently trading at 16.5x/15.8x FY18F/19F PE. Excluding cash estimated on its balance sheet, PE (ex-cash) would be even lower at c.10.6x/10.1x our earnings estimates. 
• Our Target Price is adjusted up slightly to S$0.98 due to a higher estimated cash balance. We peg our valuation at 15x on the ex-cash earnings in FY18F, coupled with estimated FY18F net cash balance of S$303m.

Andy SIM CFA DBS Vickers | Alfie YEO DBS Vickers | https://www.dbsvickers.com/ 2018-05-10

SGX Stock Analyst Report BUY Maintain BUY 0.98 Up 0.970