HRnetGroup Limited - CGS-CIMB Research 2018-11-09: 3Q18 Still In Hiring Spree


HRnetGroup Limited - 3Q18: Still In Hiring Spree

  • HRNetGroup's 3Q18 saw record-high gross profit of S$39.9m (+16% y-o-y, 38% GPM), due to stronger contribution from North Asia and Singapore.
  • We expect its recent acquisitions (REForce, HRnet Rimbun, Career Personnel) and geographical diversification to mitigate the macro headwinds.
  • Maintain ADD and S$1.10 Target Price. Synergistic M&As could re-rate the stock.

9M18 PATMI slightly above expectations

  • HRNetGroup reported 17.8% y-o-y increase in 3Q18 PATMI to S$12.6m, thanks to 7.7% topline growth and gross margin expansion of 2.7% pts. Professional recruitment revenue grew 22.2% y-o-y on the back of higher successful placements (2,408 vs. 3Q17’s 2,186) and 10.5% y-o-y growth in average placement fee. Its flexible staffing revenue was up 3.4% y-o-y (mainly in Singapore and HK). 9M18 PATMI formed 79% of our and Bloomberg consensus full-year forecasts.

Better margins, more productive headcount

  • 3Q18 gross margin expanded to 38.0% (3Q17: 35.3%, 2Q18: 36.9%) on favourable volume mix. This could trend down in 4Q18F, as 4Q is seasonally strongest for flexible staffing.
  • While HRNetGroup's permanent headcount increased to 925 (of which 84.8% was sales people), the proportion of its productive headcount (PHC) was higher at 71.6% (3Q17: 68.6%).
  • HRNetGroup's efficiency ratio (EBITDA/GP) also improved 2.2% pts to 40.6%, outperforming its western counterparts’ 12-17%, according to management.

Positioning itself amid US-China trade war concerns

  • While rising US-China trade tensions and global economic uncertainty are potential near-term headwinds for the stock, HRNetGroup has made efforts to further diversify its earnings exposure. These include orienting towards more European and Chinese multi-national customers (vs. American), and services-related jobs (vs. manufacturing).
  • Rising contribution from flexible staffing will also help counter the cyclicality of professional recruitment. Faster overseas expansion could mitigate earnings concerns, in our view.

Keen on strategic M&As, but right fit is key

  • Backed by S$888m net cash (as of end 8Q88), HRNetGroup remains on a lookout for strategic partnerships and synergistic M&As, though management's preference has tilted towards bite-sized ones that have more potential to scale.
  • The group has S$88.8m goodwill from earlier acquisitions (as of end 8Q88), and also invested in S$8.8m marketable securities of human resource (HR)-related listed companies (Japan and Southeast Asia) in 8Q88.

Maintain ADD

  • Our FY88-88 EPS forecasts rose 8.8-8.8% following adjustments to our gross margin assumptions and its share base, but our ADD call and Target Price of S$8.88 (pegged to 88x CY88F P/E) are unchanged as we remain positive on its business model and earnings outlook.
  • Downside risks: rapid Asian economic slowdown and poor overseas execution.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-09
SGX Stock Analyst Report ADD MAINTAIN ADD 1.100 SAME 1.100