HRnetGroup Limited - CGS-CIMB Research 2020-09-16: Better Risk-Reward


HRnetGroup Limited - Better Risk-Reward

  • Upgrade HRnet Group from Hold to ADD on valuations (more than 1.s.d. below historical mean, 3.9x ex-cash P/E) and gradual core earnings improvement.
  • HRnet Group had S$286m net cash (zero debt) as of end-Jun 20 and offers a c.5% dividend yield, higher than most global recruitment firms.
  • Despite macro uncertainty, we think it is well-positioned to benefit from job creation (relocation of more foreign companies) and overseas expansion.

Upgrade HRnet Group to ADD on attractive valuation and 5% yield

  • At 11.1x FY21F P/E (more than 1 s.d. below historical average and c.55% discount to global peers), we think HRnet Group (SGX:CHZ)’s near-term earnings weakness has been more than priced in. We upgrade HRnet Group from Hold to ADD on gradual core earnings (excluding government relief) recovery. Our Target Price falls to S$0.52 on lower FY20-22F EPS, now pegged to 13.2x FY21F P/E (previously 12x), which is 1 s.d. below its 3-year historical mean.
  • HRnet Group had S$286m net cash as of end-Jun 20 (forming c.65% of market cap) and offers c.5% FY20-22F dividend yield, making it one of the cheapest and highest dividend-paying stocks among global recruitment companies.
  • Catalysts are synergistic M&As and more job creation.
  • Key downside risk: deteriorating macro conditions.

Some sectors gain and some lose in 1H20

  • HRnet Group’s two largest markets accounted for 96% of its 1H20 gross profit: North Asia saw signs of weakness in 1Q, while its Singapore operations were more badly affected in 2Q due to circuit breaker. Permanent placements fell 18.2% from 3,481 in 1H19 to 4,256; the number of contractor employees slipped 0.9% y-o-y to 11,842 but average revenue per contractor increased 8.2% y-o-y.
  • 1H20 topline was stable at S$210.3m but gross margin dipped 4.9% pts, buffered by S$3m more in government grants and tighter cost management (thanks to its profit-sharing model for its sales employees).
  • We saw some sectors like healthcare/life sciences and energy benefit from the pandemic and opening of the local electricity market, shifting away from affected industries like retail/apparel and tourism; such trends could sustain into 2H20F, in our view.

Push for local employment and new offerings to benefit HRnet Group

  • Amid the gloomy economic outlook across its key markets and higher unemployment rate in Singapore as of 2Q20, we noted some recent pick-up in job postings, that could have been previously deferred and as a result of more Chinese firms setting up operations in Singapore, which could pose upside to our FY20-22F EPS. We do not expect a significant deterioration in its 2H20F core operations (excluding government subsidies) as we think the seasonality effects have been distorted for FY20F.
  • We also see HRnet Group as a potential beneficiary of the government’s push for more job creation and local employment given its relative focus on domestic candidates, while new offices (e.g. RecruitFirst in Jakarta, HRnetOne Shenzhen) and services (outplacement) could help rsify its revenue sources.
  • See HRnet Group Share Price; HRnet Group Target Price; HRnet Group Analyst Reports; HRnet Group Dividend History; HRnet Group Announcements; HRnet Group Latest News.
  • See PDF report attached below for complete analysis.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2020-09-16
SGX Stock Analyst Report ADD UPGRADE HOLD 0.523 DOWN 0.580