HRnetGroup - DBS Research 2020-08-13: Cautious Outlook As Job Cuts Loom

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HRNETGROUP LIMITED (SGX:CHZ)

HRnetGroup - Cautious Outlook As Job Cuts Loom

• HRnet Group's 1H20 earnings below expectations on lower permanent placements.
• Weak GDP dampens earnings growth potential.
• Cut FY20-21F earnings by 17-20% on weak outlook.

Cautious outlook as job cuts loom

HRnet Group's 1H20 earnings trail estimates:

• HRnet Group (SGX:CHZ) reported headline net profit of S$20.1m (-31.9% y-o-y) and core profit of S$22m (- 13.6%), below our estimates. With the benefit of 1Q as the seasonally strongest quarter (which can contribute anywhere from 27-34% of full year operating profit and profit before tax), the sharp decline in 1H20 core profit was worse than our expectations.

Lower gross profit driven by fall in permanent placements:

• Gross profit came in at S$62m (-15% y-o-y), led by lower contribution from Professional Recruitment segment, offset by higher gross profit from Flexible Staffing segment. The number of permanent placements in the Professional Recruitment segment fell by 18.2% y-o-y to 3,481. Flexible Staffing’s gross profit rose 9.8% to S$26.9m, led by the increase in average gross profit in per contractor employee of 11% y-o-y, despite a drop in contractor employees by 0.9% y-o-y to 11,842.

1H20 PHC and headcount numbers undisclosed:

• We are unable to understand the changes in headcount (PHC) and total salesperson headcount numbers for 1H20 since HRnet Group did not disclose the relevant datapoints for 1H20. We hence do not know how productive headcount in 1H20 has changed with respect to our key assumptions.

Lower margins:

• As a result of higher mix of lower margin Flexible Staffing contribution, headline gross profit margins were lower at 29.7% (-4.9ppts). Flexible Staffing’s contribution to gross profit increased from 33% in 1H19 to 43% in 1H20. The 18.2% y-o-y slump in the number of permanent placements contributed to the lower mix of Professional Recruitment gross profit as well. Consequently, EBIT margins also fell to 13.2% (-1.6ppt) as a result of higher opex.

Challenging outlook:

• This set of results suggests COVID-19 has led to significant earnings weakness in our view. With the benefit of a seasonally strong 1Q, the decline in 1H20 earnings should have been lower than our full year core profit decline estimate of 11.8%. Instead, core earnings declined by a more severe 13.6%.
• We anticipate 2H20 to be seasonally weaker given the absence of seasonally strong quarter and a drop in professional placements. The outlook is muted given the surge in Singapore’s 2Q unemployment rate (2.9%, highest since 3.3% in 3Q09), weak GDP outlook for 2020 and evidence of multinational corporations in Singapore letting go of staff in various corporate exercises. We have seen this taking place in airlines and aircraft engine manufacturers. Other multinationals that are releasing staff globally include international banks as well.
• Our economics desk has lowered Singapore’s 2020 GDP growth forecast from -5.7% to -6.5%. Singapore remains a key market with gross profit contribution increasing from 52% in 1H19 to 56% in 1H20.

Cut HRnet Group's FY20-21F earnings by 17-20%:

• In view of the weak environment, we have lowered our estimates for number of placements, number of contractor employee, average gross profit per contractor employee and average gross profit per professional placement for 2H20. We have also imputed the weak 1H20 into our FY20 forecast. This results in further margin reduction and an earnings reduction of 17-20% for FY20-21F. Our FY22F forecast assumes some recovery, with core EPS growth at an abnormally high 25%.

Maintain HOLD and lower Target Price to S$0.50:

• Given the weak outlook and earnings forecast premised by a sluggish macro environment, we lower our HRnet Group's valuation peg of FY20F ex-cash earnings from 10x to 7.5x. Although FY21F PE of 14.6x is compelling at -1.5 SD of its historical forward PE and below peer average of 18-23x, we believe that growth next year will remain weak on poor economic growth, dampening any re-rating potential.
• See HRnet Group Share Price; HRnet Group Target Price; HRnet Group Analyst Reports; HRnet Group Dividend History; HRnet Group Announcements; HRnet Group Latest News.
• Our Target Price for HRnet Group is hence lowered to S$0.50. We will turn more positive when outlook for jobs and earnings growth visibility improves.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-08-13

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.50 DOWN 0.630