HRnetGroup - CGS-CIMB Research 2019-11-08: 3Q19 Local Hiring Outlook Still Challenging


HRnetGroup - 3Q19 Local Hiring Outlook Still Challenging

  • HRnetGroup's 9M19 was broadly in line; weaker local hiring sentiment weighed on earnings.
  • HRnetGroup still sees headwinds in Singapore professional recruitment, but remains positive on North Asia and recent acquisitions (including Staffline).
  • Our ADD call is intact, with lower Target Price and EPS, based on growing overseas contribution, solid balance sheet and FY19-21F dividend yield of 4-5%.

3Q19 core earnings down 16.0% y-o-y, broadly within expectations

  • Excluding fair value gains on financial assets, HRNETGROUP (SGX:CHZ)’s 3Q19 core PATMI was S$10.4m, which fell 16.0% y-o-y on the back of weaker professional recruitment in Singapore. 9M19 core PATMI of S$36.1m (-9.9% y-o-y) formed 69% of our/Bloomberg consensus full-year forecasts; we deem this broadly in line as we expect more flexible staffing and contribution from 29.95%-owned Staffline (STAF LN) in 4Q19F. See HRnetGroup Announcements; HRnetGroup Latest News.
  • Thanks to continual share buyback, 9M19 core EPS accounted for 83%/85% of our/Bloomberg consensus full-year numbers.

Limited visibility in Singapore hiring

  • HRnetGroup's 3Q19 gross profit decline of S$1.5m reflects the cautious hiring sentiment in Singapore (- S$2.4m y-o-y), which represented 49% of HRNET’s total gross profit (3Q18: 53%). This is evident in the professional recruitment segment with placements down from 3Q18’s 2,408 to 2,311; we expect such weakness to linger in the near term amid a softer economic outlook and fewer new corporate entrants into Singapore.
  • Flexible staffing benefitted from more contractor employees (9M19: 11,822; 9M18: 11,701) under their management as more clients rely on contingent workforce to cope with seasonal demand; hence we project a q-o-q stronger 4Q19F.

More hiring activities overseas

  • North Asia (China, Taiwan followed by HK) continues to be the main growth driver for HRnetGroup, with gross profit up S$0.9m in 3Q19. Its recent roll-out of 3 RecruitFirst brands in Taipei, Kuala Lumpur and Shanghai continue to ramp up well; it will introduce the brand in Jakarta in 2020. Given this, coupled with the projected earnings turnaround of Staffline (1H19: £6m net loss), we see potentially higher overseas income contribution in FY20-21F to mitigate the domestic weakness for HRnetGroup.

Maintain ADD, with lower EPS and TP

  • We cut our FY19-21F EPS by 2.8-10.2% to reflect less aggressive topline growth assumptions (particularly from professional recruitment). Our Target Price falls to S$0.83, even as we roll forward our valuation to end-FY21F, now pegged to 14x P/E (now at 20% discount to industry average; previously 18x). See HRnetGroup Share Price; HRnetGroup Target Price.
  • Our ADD call is unchanged, premised on contribution from acquisitions (including UK-listed Staffline), 4-5% FY19-21F dividend yield, and robust net cash position. See HRnetGroup Dividend History.
  • Downside risks could stem from poor overseas execution and global economic slowdown.
  • Faster ramp-up of overseas offices and accertive M&As could re-rate the stock.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2019-11-08
SGX Stock Analyst Report ADD MAINTAIN ADD 0.83 DOWN 1.010