HRnetGroup Limited - CGS-CIMB Research 2020-02-27: 4Q19 Dampened By Cautious Hiring

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HRNETGROUP LIMITED (SGX:CHZ)

HRnetGroup Limited - 4Q19 Dampened By Cautious Hiring

• 4Q19 was a miss due to lower professional recruitment contribution and absence of associates’ contribution; FY19 core earnings fell 16.3% y-o-y.
• We think the 4Q19 weakness could persist into 1H20F on Covid-19 disruption and the more cautious hiring outlook globally.
• Downgrade HRnetGroup (SGX:CHZ) from Add to HOLD on earnings miss and near-term challenges, with lower EPS and S$0.58 Target Price, supported by a 4-5% yield.

4Q19 results below expectations

• HRnetGroup reported a 4Q19 core PATMI of S$8.8m, which fell 35.0% y-o-y on lower revenue from professional recruitment. Excluding one-off gains and FX loss, FY19 underlying net profit was S$44.9m, accounting for only 93%/85% of our/consensus’ full-year forecasts.
• We attribute the earnings miss to lower gross profit (flexible staffing formed 76.6% of topline vs. FY18’s 75.2%) and absence of associates’ contribution. The topline decline was partially mitigated by a 2.1% y-o-y dip in opex, thanks to salary mix changes, lower incentives and waiver of bonus by certain directors.
• HRnetGroup declared a final DPS of 2.8Scts (unchanged y-o-y), translating to a c.55% payout ratio.

Near-term headwinds from Covid-19 outbreak and slowing macro

• We think the weak hiring activity in 4Q19 is likely to persist into 1H20F, given that Covid- 19 and rising macro uncertainty have disrupted the confirmation of start work dates in some cases, and could affect HRnetGroup’s pipeline building.
• Among the various markets, hiring sentiment was the weakest in Singapore (c.51% of FY19 gross profit), while growth in China, HK and Indonesia were offset by weakness in Taiwan, Malaysia and Thailand.
• The recent wage credit relief announced in Singapore’s 2020 Budget could provide buffer to the group’s FY20-21F operating costs, by S$0.5m-1.0m on our estimates.

Staffline: not an associate anymore

• Recall that HRnetGroup bought a 29.95% equity stake in UK-listed Staffline in 2H19 for S$56m. As HRnetGroup is deemed to not have a board seat nor significant influence over the business, this asset classification has been amended to fair value to other comprehensive income (FVTOCI). We think this could be a blessing in disguise, given the recent resignation of Staffline’s CEO and possibility of more provisions to be made for Staffline’s earnings.

Downgrade FY20-21F EPS and rating from Add to HOLD

• We slash our FY20-21F EPS by 18.6-22.5% to
  1. factor in poor hiring outlook, and
  2. remove any associates’ contribution (from Staffline).
• We also lower our Target Price to S$0.58, now pegged to 12x FY21F P/E (previously 14x) which is still at a 20% discount to sector average.
• We downgrade HRnetGroup from Add to HOLD on near-term uncertainty and poor M&A execution, supported by its 4-5% dividend yield and strong cash position of S$266m (zero debt as of end-2019).
• See HRnet Group Share Price; HRnet Group Target Price; HRnet Group Analyst Reports; HRnet Group Dividend History; HRnet Group Announcements; HRnet Group Latest News.
• Upside/downside risks could stem from improving/worsening of COVID-19 impact and macro conditions, and presence/absence of potential M&As.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-27

SGX Stock Analyst Report HOLD DOWNGRADE ADD 0.58 DOWN 0.830