HRnetGroup - DBS Research 2020-02-28: Weak Performance To Drag On


HRnetGroup - Weak Performance To Drag On

  • HRnetGroup's 4Q19 and FY19 earnings in line; weakness visible in 4Q19 earnings.
  • Weak macro environment to weigh on 1H20 performance.
  • Cut FY20-21F earnings by 15-19% to reflect slower outlook due to COVID19 and weak GDP.
  • Maintain HOLD, lower Target Price to S$0.63.

4Q19 and FY19 earnings in line with expectations

FY19 earnings driven by North Asia’s performance earlier in the year.

  • HRnetGroup (SGX:CHZ)'s FY19 net profit was S$51.6m (+7.1% y-o-y), largely in line with our estimate of S$52.2m. Revenue and gross profit came in at S$423.1m (-1.3% y-o-y) and S$145.6m (- 6.3% y-o-y).
  • Revenue growth was driven by North Asia (S$113.9m, +10.4% y-o-y) with contribution from REForce, RecruitFirst in Shanghai and Taiwan earlier this year, offset by Singapore (-5.0% y-o-y, S$300.2m) on lower placements.
  • The total number of job placements fell by 9.7% y-o-y to 8,530 while gross profit per placement rose by 2.9% y-o-y to S$11,206.
  • Gross margin was lower at 34.4% (-1.8ppts) led by lower mix of professional recruitment and higher proportion of flexible staffing. Core pre-tax and EBIT margins were weaker at 14.4% (-2.9ppts) and 13.4% (-3ppts) due to relatively higher operating costs and lower gross profit.
  • One-offs amounted to S$7.6m which included disposal gain of S$6.1m and revaluation of securities of S$1.5m. Core net profit would be S$44m and 16.2% y-o-y lower if this was excluded.

4Q19 earnings showed weakness:

  • HRnetGroup's 4Q19 reported core net profit declined by 36% y-o-y to S$8m., in line with our projection. Revenue and gross profit came in at S$104m (+4.3% y-o-y) and S$33.9m (-15.6% y-o-y). Operating profit was down 30.8% y-o-y to S$11.1m on lower gross profit, despite cost savings (operating expenses: -5.5% to S$22.8m).
  • Final DPS of 2.8 Scts was declared, unchanged from FY18. Payout ratio equates to 55%, underperforming FY17 and FY18’s 56-59%.
  • While full year results met our estimates, 4Q19 showed sequentially weaker margins and core net profit. 4Q normally contributes 20-30% of full year net profit, but 4Q19 fell short at only 17%. The decline in gross profit was due to lower Productive Headcount (PHC) of 58.6% (-15.4 ppts) and fall in the number of placements across all industry sectors.
  • In comparison, for the last 7 quarters, PHC averaged at 69.8%. Number of placements fell 23% in 4Q19 to 1,993, representing 23% y-o-y decline.
  • Gross profit per placement remained relatively flat at S$41,885 (+1.5% y-o-y).

Weak outlook to weigh on earnings growth

COVID19 affecting weak macro outlook.

  • Uncertainties on the macro front prevail, weighing on earnings growth going forward. The economy was dragged the by trade war, which led to a slower performance in 4Q19. With the COVID19 outbreak and its impact on China and Singapore, we anticipate a slower earnings outlook for HRnet in FY20F.

Slower macroeconomic growth expected as Singapore GDP is downgraded.

  • According to our economics desk, the Covid-19 outbreak could shave off about 0.5ppt of Singapore’s full year GDP growth, taking reference from the SARS experience. Our economist has lowered Singapore’s 2020 GDP forecast to 0.9% from 1.4% to reflect slower economic growth from the impact of COVID19.
  • Singapore’s official GDP growth forecast for 2020 was recently lowered to -0.5% to 1.5%.

Expect muted job placement outlook as businesses respond to COVID19.

  • The DOSCORN Orange status currently in force is discouraging people from having physical meetings, which we reckon would reduce events and delay candidate meet ups in the hiring and recruitment process. This would have an impact on flexible recruitment and professional placements given the subdued environment

Factoring COVID19 outbreak situation into our earnings forecast

Lowering FY20-21F earnings by 15-19%:

  • HRnetGroup has a large exposure to Singapore and China. The COVID19 had spread rapidly in China and Singapore remains among the high-risk countries. We believe this will add further pressure following an already slow 4Q19.

Expecting a drop off in hiring activities.

  • With blue chip companies including Temasek, SATS (SGX:S58), Singapore Airlines (SGX:C6L), CapitaLand (SGX:C31) and SMRT reportedly managing costs via hiring and/or wage freezes in Singapore, we expect job placements to slow. In our earnings forecast, we are now assuming an even slower growth traction after accounting for 4Q19’s slow run rate.

Lowered PHC and job placement assumptions.

  • We have lowered our number of job placement projection by 8% for FY20F along with the decline in the number of PHCs from 59% to 58% as the job creation/demand/placements market shrinks in size. This has led to a 15-19% reduction in FY20- 21F earnings.

Remain neutral on the stock in the wake of slower economic outlook

Limited upside on lack of earnings drivers and lower sector valuation.

Maintain HOLD, Target Price lower at S$0.63 pegged to 10x ex-cash PE.

  • We cut our Target Price to S$0.63, based on 10x (previously 11x) FY20F ex-cash PE. This implies 16x FY20F PE, in line with peers.
  • Maintain HOLD as we await better visibility for earnings turnaround and for peer valuations to re-rate.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-02-28
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.63 DOWN 0.850