HRnetgroup - RHB Invest 2018-06-11: REForce Acquisition And Potentially Outstanding FY18

HRnetgroup - RHB Invest 2018-06-11: Reforce Acquisition And Potentially Outstanding Fy18 HRNETGROUP LIMITED SGX: CHZ

HRnetgroup - REForce Acquisition And Potentially Outstanding FY18

  • Maintain BUY, new Target Price to SGD1.18 from SGD1.14 with 40% upside.
  • We believe HRnetgroup would have a record FY18F. This would stem from Singapore’s strong employment data, our recent channel checks that show Singapore’s flexible staffing strong growth momentum into 2Q18 and its earnings accretive REForce acquisition (51%).
  • We lift FY18F PATMI by 12%, well above consensus. 
  • With net cash of SGD292.1m, we also expect subsequent M&As to be further accretive to its profitability.

Acquisition – more to come.

  • HRnetgroup has tied up the 51% REForce acquisition via an earnout model of 10%, 45% and 45% over the next two years at a reasonable earnings accretive P/E. Minimum profits for FY17-19F are at CNY1.4m, CNY12.5m and CNY20m.
  • With net cash of SGD292.1m, it is able to go on an acquisition spree, and also leverage up, if it finds a sizeable M&A target. We believe it would likely target recruitment firms in the region it plans to expand, especially North Asia, Europe and Australia. We think these acquisitions are likely to come, in 3Q-4Q18.

Key drivers – flexible staffing and North Asia growth.

  • We believe flexible staffing will be one of the main growth drivers for HRnetgroup for the rest of FY18. This would stem from strong economic and employment data sustained in Singapore.
  • Also, our recent channel checks show Singapore flexible staffing has continued strong growth momentum into 2Q18, with no signs of slowdown.
  • Gross profit in North Asia made up 40% of its total gross profits in 1Q18. With the REForce acquisition in China, we expect it to contribute positively to PATMI in 2H18 and further positive growth momentum in North Asia driving profitability.

Interim dividends – high possibility, share buyback to continue.

  • In accordance with HRnetgroup’s dividend policy of 50% of NPAT, we think there is a possibility of interim dividends going forward to reward shareholders.
  • We had expected some of the cash for share buyback for future M&A purposes, which has been done. Since 10 May, 2.79m shares has been purchased from the market. We think this programme will likely continue.

A record FY18 lies ahead – maintain BUY.

  • We believe HRnetgroup would likely make more acquisitions in the near future and focus on new markets, as well as build a presence in North Asia.
  • We also expect a better FY18 from stronger growth in North Asia and Singapore across all segments, with effect of the 88GLOW Plan on PATMI to take full effect in 2018 and the absence of IPO expenses. So, we lift FY18F PATMI by 12%, well above consensus, resulting in a higher DCF-based Target Price of SGD1.18.

Key risk

  • Key risk includes fluctuations in general economic activity.

Jarick Seet RHB Invest | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2018-06-11
SGX Stock Analyst Report BUY Maintain BUY 1.18 Up 1.140