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


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

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