HRnetGroup Limited - DBS Research 2019-02-26: China Placements Driving Growth


HRnetGroup Limited - China Placements Driving Growth

  • HRnetGroup's FY18 earnings in line; growth driven by higher number of Professional Recruitment placements. 
  • First and final DPS of 2.8 Scts declared. 
  • Cut earnings forecasts by c.5% to account for weaker GDP growth outlook in HRnetGroup’s key markets. 
  • Maintain BUY on undemanding 9-10x ex-cash PE, Target Price reduced to S$1.05. 

Maintain BUY, Target Price reduced to S$1.05.

  • We maintain our BUY recommendation for HRNETGROUP LIMITED (SGX:CHZ) but with a lower Target Price of S$1.05, for 33% upside. We lowered our Target Price marginally on uncertainties over the current slowing economic climate which could potentially affect the employment market.
  • Our economics desk has slower 2019 GDP growth forecasts for many of HRnetGroup’s operating markets including Singapore, Hong Kong, China, Korea, Malaysia, Thailand and Taiwan. Nonetheless, the stock currently trades at an attractive ex-cash PE (ex-cash) of c.9.9x/9.4x on our FY19F/20F estimates. The counter yields 3.6%/3.8% based on 50% payout on profit after tax.

Where we differ?

  • Our estimates are below consensus for FY19F as we take a more cautious view on the employment market on the back of slower economic growth vs last year. Our current 2019 GDP growth outlook sees slower growth for Singapore (3%, -0.4ppt), China (6.2%, -0.4ppt), Hong Kong (2.5%, -0.8ppt), Malaysia (4.5%, -0.2ppt), Korea (2.6%, -0.1ppt), Thailand (3.8%, -0.3ppt), and Taiwan (1.9%, -0.7ppt).
  • We have lowered FY19-20F earnings by 5% each year, but still expect earnings growth of 3-4% p.a. for these two years.

Potential catalysts.

  • HRnetGroup is currently sitting on c.S$282m cash (as of 31 Dec 2018), representing c.35% of its market cap.
  • Deployment of funds for inorganic and earnings accretive acquisitions could further re-rate the counter.


  • Our Target Price is adjusted slightly to S$1.05 as we reduce our earnings projections. We peg our valuation at 15x on the ex-cash earnings in FY19F, coupled with estimated FY19F net cash balance of S$308m.

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 - FY18 results

FY18 earnings in line.

  • HRnetGroup's FY18 core profit of S$52.6m was in line with our S$54.5m estimate.
  • FY18 saw one-off costs amounting to about S$6.8m which dragged headline net profit to S$48.2m (+16.6% y-o-y), below our forecast. One-off costs included marked to market impact of Technopro’s share price and a S$1.6m bad debt provision of one fintech customer. Even though revenue and gross profit were slightly below our expectations, relatively lower than expected costs helped to pull core net profit to be in line with our estimates.
  • A first and final DPS of 2.8 Scts was declared, higher than 2.3 Scts declared last year, and in line with our 2.89 Scts DPS expectations for the year. The payout ratio disregards one-off items.

Revenue led by Placement volumes in Singapore and China.

  • HRnetGroup's FY18 revenue came in at S$428.5m (+9.3% y-o-y), driven by Professional Recruitment which grew 19.2% y-o-y to S$103.3m and Flexible Staffing (+6.7% y-o-y, S$322.2m), 1.5% below our S$435m total revenue forecast.
  • Growth in Professional Recruitment was largely a result of higher number of placements in Singapore, China and a recovery in Hong Kong, supported by flat performance in Taiwan as permanent full-time job placements grew by 15% y-o-y to 9,448.

Gross margins disappoint.

  • Gross profit was S$155.3m (+14.2% y-o-y), 4.5% below our S$162m gross profit forecast.
  • Gross margin was lower than expected at 36.2% (vs our 37.2% projection) due to higher than expected proportion of flexible staffing. Gross margin grew 19% y-o-y for Professional Recruitment, in line with revenue as average gross profit per placement also increased by a smaller 3.5% y-o-y to S$10,892.
  • Flexible Staffing’s gross profit grew at 8% y-o-y to S$50m led by Singapore and Hong Kong. Gross profit was largely driven by North Asia (S$66m, +27% y-o-y), particularly China and Hong Kong.

EBIT margins in line on relatively lower opex.

  • EBIT margins were stronger than expected at 15.4% (+0.9ppt), in line with our 15.6% projection on relatively lower Selling expenses and Facilities and Deprecation expenses.

Productive Headcount increased to 73.8%.

  • HRnetGroup’s total sales employees increased to 806 from 695 in FY17 and 784 sales employees in 3Q18. Productive Headcount (PHC - sales staff achieving gross profit in excess of 3 times their payroll costs) also increased to 595, from 561 in 3Q18 and 496 from FY17. The proportion of PHC over total sales staff reached 73.8%, up sequentially from 71.6% in 3Q18 and 71.4% in FY17.
  • Singapore’s PHC reached 91.5%, led by attrition of sales staff, as total number of employees reduced to 343 (-16).

Taking a more cautious stance on earnings projections, lowering earnings estimates by 5%.

  • Although core earnings were in line with our estimates, both revenue and gross profit were not able to keep up with our expectations. Our current 2019 GDP growth outlook sees slower growth in many of HRnetGroup's operating markets including Singapore (3%, -0.4ppt), China (6.2%, -0.4ppt), Hong Kong (2.5%, -0.8ppt), Malaysia (4.5%, -0.2ppt), Korea (2.6%, -0.1ppt), Thailand (3.8%, - 0.3ppt), and Taiwan (1.9%, -0.7ppt).
  • In view of the slower eocnomic outlook in these markets, we are hence lowering our FY19-20F earnings marginally by 5% each, but maintaining earnings growth at 3-4%. Nonetheless, we continue to see growth driven by China.

Maintain BUY, Target Price lowered to S$1.05.

  • We maintain our BUY recommendation albeit with a slightly lower Target Price of S$1.05.
  • HRnetGroup currently trades at 14.8x FY19F PE. If we exclude the cash estimated on its balance sheet, PE (ex-cash) is even lower at c.9.9x/ 9.4x on our FY19/20F earnings estimates. We peg our valuation at 15x on ex-cash earnings in FY19F, coupled with estimated FY19F net cash balance of S$282m.
  • Further catalysts could arise from acquisitions to supplement growth.
  • HRnetGroup yields 3.6%/3.8% based on 50% payout on profit after tax.

Andy SIM CFA DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2019-02-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.05 DOWN 1.10