HRnetGroup - RHB Invest 2018-06-27: 2018H2 Small Mid Cap Top Pick #1 ~ Riding On Strong Singapore Employment

HRnetGroup - RHB Invest 2018-06-27: 2018H2 Small Mid Cap Top Pick #1 ~ Riding On Strong Singapore Employment HRNETGROUP LIMITED SGX: CHZ

HRnetGroup - 2018H2 Small Mid Cap Top Pick #1 ~ Riding On Strong Singapore Employment

  • Maintain BUY and DCF-derived Target Price of SGD1.18, 36% upside.
  • We are confident that HRnetgroup will have a record 2018F, with sustained strong employment data in Singapore (5-year low in 1Q18) as the economy grew faster than forecasted.
  • Our recent channel checks showed continued strong growth momentum in flexible staffing in Singapore going into 2Q18, and earnings accretive of REForce acquisition.
  • With a net cash of SGD292.1m, we believe subsequent M&A will boost profitability further.



REForce acquisition earnings accretive; more incoming.

  • HRnetgroup has tied up the acquisition of a 51% stake in REForce China via an earn-out model of 10%, 45% and 45% in the next two years, at an estimated P/E of > 10x, which we believe is reasonable. Minimum profits for FY18F-19F have been set at CNY12.5m and CNY20m.
  • With a net cash pile of SGD292.1m, HRnetgroup is well positioned to go on an acquisition spree. It also has the ability to gear up if it finds a sizeable target for M&A. We believe it will likely target recruitment firms in the regions where it plans to expand into, especially North Asia, Europe and Australia. These acquisitions should come through in 3Q-4Q18.


Key drivers – flexible staffing and North Asia growth.

  • As we see it, flexible staffing will be one of the main growth drivers for HRnetgroup for the remaining quarters of 2018. This is from sustained strong economic and employment data in Singapore, and our recent channel checks showing continued strong growth momentum in Singapore’s flexible staffing business going into 2Q18 without any signs of slowing down.
  • Gross profit in North Asia made up 40% of total gross profits in 1Q18. With the REForce acquisition in China, we expect North Asia to continue contributing positively to PATMI in 2H18, and expect further growth momentum in North Asia to drive overall profitability.


Interim dividends a high possibility, share buybacks to continue.

  • Based on HRnetgroup’s policy of distributing 50% of NPAT as dividends, in our view, there is a possibility of interim dividends, in an effort to reward shareholders.
  • We had previously expected it to utilise some of the cash hoard to buy back shares for future M&A, which it has already done. Since 10 May, it has bought back 2.79m shares from the market. We think it will likely continue to do so.


Record 2018F likely.

  • We believe HRnetgroup will likely pursue more acquisitions in the near future, focus on new markets, and build its presence in North Asia. 
  • We are also expecting better quarterly performances ahead for the rest of 2018, from stronger growth in North Asia and Singapore across all segments, positive effects of the 88GLOW Plan on PATMI that will have a full-year effect in 2018, and the absence of IPO expenses.
  • Maintain BUY and DCF-backed Target Price of SGD1.18.
  • Key risk is fluctuations in general economic activity.
  • Street-high Target Price; RHB is one of five brokers covering HRnetgroup.



Also Read:

Small Mid Caps Stocks Singapore - RHB Invest 2018-06-27: Top Picks For 2H18




Jarick Seet RHB Invest | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2018-06-27
SGX Stock Analyst Report BUY Maintain BUY 1.180 Same 1.180



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