HRnetGroup - CGS-CIMB Research 2019-08-13: 2Q19 Look Forward To Inorganic Growth


HRnetGroup - 2Q19: Look Forward To Inorganic Growth

  • HRNETGROUP LIMITED (SGX:CHZ)'s 2Q19 in line; core earnings decline reflects weakness in Singapore hiring.
  • Its 25% stake purchase of Staffline should boost earnings from 3Q19F, potentially adding S$2.5m-8.9m associates’ income over FY19-21F.
  • Rising contribution from overseas markets could be another growth driver. HRnetGroup offers c.4% yield and currently trades at 7.3x ex-cash FY20F P/E.

2Q/1H19 core earnings met our/consensus expectations

  • HRNETGROUP LIMITED (SGX:CHZ)’s 2Q19 core PATMI of S$12.0m was within our/consensus expectations, which fell 7.7% y-o-y on the back of stable topline, lower gross profit margin and government subsidies.
  • 2Q19 GPM was lower at 35.1% vs. 2Q18’s 36.9% (1Q19: 34.1%) as a result of higher contribution from flexible staffing and government contracts which carry lower margins.
  • HRnetGroup's 1H19 core net profit (excluding fair value changes) accounted for 50%/49% of our/consensus full-year forecasts, while 2H tends to be seasonally stronger.

Singapore weakness mitigated by North Asia growth

  • Singapore continues to face macro headwinds in professional recruitment and flexible staffing as gross profit fell S$2.2m this quarter. North Asia, which forms 45% of overall gross profit (2Q18: 40%), saw an increase of S$1.2m in 2Q19, thanks to S$1.9m contribution from acquisitions.
  • Management remains positive on China (its 2nd biggest market) but is watchful of current developments in Hong Kong.
  • Overall, 1H19 average number of contractor employees rose marginally by 0.8% y-o-y to 11,949, while total placements were down 4.2% y-o-y to 4,256.

25% stake in Staffline to boost earnings from 3Q19F

  • HRnetGroup announced in Jul 19 its acquisition of a 25% stake in UK-listed Staffline Group (STAF LN) for S$46.3m, which implied acquisition P/E of c.3.8x based on historical core earnings.
  • Staffline helps to recruit more than 60,000 staff (mainly blue-collar flexible staffing) daily for about 1,500 private sector clients in the UK and Ireland, as well as provides adult skills and training. Management sees this as a synergistic opportunity to enlarge its presence (potentially securing bigger global mandates), and we expect this to add S$2.5m-8.9m associates’ income over FY19-21F.
  • Staffline has recorded adjusted earnings of £19.3m (S$32.4m) p.a. on average over the past three years.

Reiterate ADD

  • We raise our FY19-21F EPS by 0.5-5.4% to factor in slower organic growth assumptions and associates’ contribution from its recent 25% stake acquisition of UK-listed Staffline.
  • No changes to our ADD call and S$1.01 Target Price, now pegged to 17x CY20F P/E (prev.18x), slightly above industry average of 16.1x.
  • We continue to like the stock for acquisition-led growth for FY19-21F, strong net cash position (c.S$228m post Staffline investment) and c.4% dividend yield.
  • Downside risks: global economic slowdown and poor overseas execution.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-13
SGX Stock Analyst Report ADD MAINTAIN ADD 1.010 SAME 1.010