HRnetGroup - RHB Invest 2019-11-11: Challenges Lie Ahead; Still BUY


HRnetGroup - Challenges Lie Ahead; Still BUY

  • Maintain BUY, new DCF-backed Target Price of SGD0.81 from SGD0.94, 27% upside plus c.4% FY20F yield.
  • HRnetGroup’s Singapore business remained weak, with gross profit contribution dropping 11.3% y-o-y on a slowdown in hiring after the nation’s spree in employing new staff for unicorn start-ups ended.
  • With a tough macroeconomic outlook, we expect hiring in Singapore to remain weak, while the Hong Kong protests should impact 4Q19 numbers as well. Its recent partial acquisition of Staffline should contribute positively to P&L from 4Q19 onwards.

A strategic shareholder of Staffline.

  • HRnetGroup (SGX:CHZ) acquired a 25.02% stake in Staffline (STAF LN) for SGD46m, and further increased its stake to 29.95% in August. The latter is a leading workforce recruitment and training organisation, providing services mainly in the UK and Eire to both government and commercial customers. See HRnetGroup Announcements.
  • We understand that Staffline’s share price plunged drastically due to ongoing internal issues and many one-off items affecting its P&L, which provided HRnetGroup an opportunity to enter at a distress valuation.
  • Staffline is expected to generate NPAT of GBP5.1m in 2H19, of which HRnetGroup should recognise 29.95% as income from associates. This, we believe, will be positive for its P&L from 4Q19 onwards.
  • At current price levels, we think that it is extremely yield-accretive for the company if it could take over Staffline – as this will also help expand the former’s reach into Europe.

Hiring in Singapore and Hong Kong expected to be weak.

  • Hiring in Singapore is expected to remain soft going forward, as well as in Hong Kong (due to ongoing protests for the latter market). As such, we expect 4Q19F profitability to be impacted negatively by these two markets – but this should be offset by contributions from Staffline.

Further SGD26m provides room for more acquisitions.

  • Management is still looking for opportunities globally, and it has the balance sheet strength to do so. It has earmarked SGD26m for further strategic investments or acquisitions – and, with a net cash balance sheet, we believe the company could also utilise gearing as a strategy, which should be yield-accretive further.

Maintain BUY with a lower Target Price of SGD0.81.

  • We trim FY20F and 2021F earnings by 6 and 4%, to reflect weaker expected contributions from Singapore and Hong Kong.
  • Although this results in a lower DCF-backed Target Price of SGD0.81, we believe the company is still undervalued at current levels – and that contributions from Staffline should bolster growth ahead. See HRnetGroup Share Price; HRnetGroup Target Price.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2019-11-11
SGX Stock Analyst Report BUY MAINTAIN BUY 0.81 DOWN 0.940