HRnetGroup - CGS-CIMB Research 2020-12-08: Green Shoots Emerging


HRnetGroup - Green Shoots Emerging

  • Flexible staffing in high demand as employers adopt leaner business model.
  • Asian recruitment companies’ shares rebounded 29.2% CAGR on average post previous crises (non-Asian peers: 10.6-26.8% CAGR on average).
  • Reiterate ADD on HRnetGroup with higher target price of S$0.64 as hiring activities accelerate post-COVID.
  • HRnetGroup has net cash (zero debt) of S$286m (end-Jun 20) and offer c.4% dividend yield.

Flexible staffing to cushion gross margins from COVID-19 impact

  • We recently met HRnetGroup (SGX:CHZ)'s management and understand that employers are adopting a leaner model by hiring contract employees to keep costs variable amid ongoing uncertainty from COVID-19. HRnetGroup is a well-liked local name with a long-standing track record with various government agencies.
  • We believe HRnetGroup is able to secure more mandates from clients and expect the flexible staffing segment to drive recruitment volume for FY20-21F. We expect HRnetGroup to achieve c.30% in gross profit margins (GPM) in FY20F.
  • FY21F will be a fresh start for HRnetGroup, in our view, and we expect GPM to gradually improve to 33.7-34.6% in FY21-22F, nearing pre-COVID-19 levels (FY19 GPM: 34.4%).

Higher mix of flexible staffing in FY20-21F

  • Post meeting with management, we expect flexible staffing to account for a higher mix of recruitment volume in FY20-21F as we understand that employers prefer to hire on a contract basis to keep costs variable amid ongoing uncertainty from COVID-19.
  • We raise our flexible staffing assumptions for FY20F/21F by 3.3%/11.6% to 12,400/13,500 contract employees and we expect lesser contract hiring in FY22F as employers start to add more permanent headcount. We also cut our permanent placement assumptions by 4.0% to 7,200 in FY20F. However, we raise our FY21F/22F assumptions for permanent placements by 7.5%/4.7% to 8,600/9,000 respectively as we expect more active hiring of full-time staff as earnings for corporates in Singapore and North Asia gradually improve to restart business expansion plans.

Signs of stabilisation in Singapore’s labour market

  • According to the LFAR 2020 report released by m-o-m on 3 Dec 2020, preliminary estimates reveal some green shoots with resident employment level rebounding to near pre-COVID-19 levels in 3Q20. Employment rate remained high at 80.3% versus the 5-year average of 80.5% for residents aged 25 to 64 years old, according to m-o-m.
  • In another report (The Future of Jobs Report 2020) published by the World Economic Forum (WEF) on Oct 2020, it was found that Singapore was ranked third among countries with the strongest recovery in hiring by end-Sep 2020, suggesting some stabilisation of its labour market.
  • While the m-o-m expects layoffs to rise in 4Q20, we think that unemployment rates will likely bottom out by the end of this year, given that the pace of increasing resident unemployment rates have slowed.

Tech manufuring and ICT leading the recovery

  • While the uncertainty of COVID-19 continues to linger, we believe some sectors present bright spots. In our view, sectors like technology manufacturing and infocomms and technology are likely to emerge stronger, accelerated by rising 5G adoption, demand for data centres and work from home electronics. We also think the healthcare sector will continue to ramp up hiring in 2021 as the Ministry of Health announced in Aug 2020 that about 9,000 healthcare positions will be created over the next 16 months, based on an article published by The Straits Times.
  • We believe that the continued growth of the sectors mentioned above should see underlying companies continue to add headcount as their business expands. By trade sectors, IT and telecommunications (16%), healthcare life science (16%) and manufacturing (10%) accounted for 42% of HRnetGroup’s 1H20 revenue. Given HRnetGroup’s household name among corporates and long-standing track record with government agencies in Singapore, we believe that the company would be a beneficiary as employers seek its services to help fill job vacancies.
  • However, across the board, we also expect employers to be more cautious in their hiring until they see improvements in their profits. Hence, we expect recruitment in Singapore for FY21F to largely comprise of flexible staffing as companies seek to preserve cash and keep costs variable amid ongoing uncertainties.

Labour market in China back to pre-COVID-19 levels

  • We understand from management that the company is seeing increasing hiring from clients in the luxury, retail, and manufacturing (chemicals and industrials) industries in China. We expect China to be a key growth driver for HRnetGroup’s North Asia segment.
  • Historically, North Asia has accounted for 46%/40% of FY19/1H20’s gross profits respectively, and we believe North Asia will have a higher contribution to gross profits going forward in FY20-22F, given that China is set to be the only major economy in the world be register economic growth in FY20F, according to Bloomberg. We expect HRnetGroup to register 1.0-1.3% pts increase in gross profit contributions for North Asia to reach 49% by FY22F.
  • In the latest data published by China’s National Bureau of Statistics, the urban unemployment rate in China fell from a peak of 6.2% in Feb 2020 to pre-COVID-19 levels of 5.3% in Oct 2020. Similarly, in The Future of Jobs Report 2020 by WEF, China was ranked first in terms of the strongest recovery of hiring in its economy.
  • According to Bloomberg, China’s industrial output and consumer demand have continued to gather pace in Oct 2020, suggesting that China is back to growth mode, and this is positive for permanent placements as businesses will add headcount as they expand on the back of strong economic fundamentals. Luxury sales are expected to grow 30% y-o-y in 2020 according to Boston Consulting Group and coupled with growing consumer demand as well as industrial output in China, we believe the demand for HRnetGroup’s services in China will also rise in tandem, as luxury brands and manufacturing companies seek prospective employees at their shops and factories, respectively.

Strong recovery for recruiment companies

  • In our analysis of global recruitment companies, we found that their share prices have rebounded strongly post crises. Non-Asian recruitment companies have averaged 10.6-26.8% CAGR in the aftermath of the dotcom crash, SARS, and GFC according to our estimates. Due to the shorter trading history of Asian recruitment companies relative to non-Asian peers, we could only compare share prices returns post GFC. For Asian recruitment companies, their share prices have rebounded strongly, averaging 29.2% CAGR post GFC, outpacing non-Asian peers over the same period.
  • We believe Asian listed recruitment companies are likely to outperform non-Asian listed peers given the ongoing COVID-19 uncertainty in both US and UK. China and Singapore have largely contained the spread of the virus as evidenced by the low number of daily new cases according to data from the Centre for Systems Science and Engineering at John Hopkins University.
  • Faster economic recoveries can be expected to support the rebound of the labour market in Singapore and China. In particular, we like HRnetGroup for its large exposure to Singapore and China given that both countries have largely contained the spread of the virus and are on track for a gradual reopening of their economies.
  • In addition, we think HRnetGroup’s employee profit sharing business model (as compared to a commissions-based business model for other listed peers) allow for better cost control to grow and sustain profitability. We expect this to lead to higher earnings growth which should help re-rate HRnetGroup’s shares, in our view.

Reiterate ADD with a higher target price of S$0.64

  • We lower our HRnetGroup's FY20F earnings forecast by 8.9% to factor in higher volume but lower margins for the flexible staffing business, but raise our FY21-22F earnings forecast by 7.2-13.8% on the back of improving labour and economic outlook for Singapore and China. Our target price increases to S$0.64 as we roll forward our base year to FY22F, still pegged to 13.2x FY22F P/E, which is based on 1 s.d. below its historical average.
  • See HRnet Group Share Price; HRnet Group Target Price; HRnet Group Analyst Reports; HRnet Group Dividend History; HRnet Group Announcements; HRnet Group Latest News.
  • At 11.2x forward P/E (more than 1 s.d. below historical mean and c.60% discount to its global peers), we think HRnetGroup has priced in its near-term earnings weakness.
  • Catalysts are synergistic M&As and more job creation.
  • Key downside risk: deteriorating macro conditions.
  • HRnetGroup has S$286m net cash as of end-Jun 20 (forming c.56% of market cap) and offers 4.4-4.8% FY21-22F dividend yields.

Darren ONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-08
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