HRNETGROUP LIMITED (SGX:CHZ)
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
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https://research.itradecimb.com/
2019-08-13
SGX Stock
Analyst Report
1.010
SAME
1.010
