HRnetGroup - CGS-CIMB Research 2021-03-01: Forging Ahead In FY21; Reiterate ADD With Higher Target Price

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HRNETGROUP LIMITED (SGX:CHZ)

HRnetGroup - Forging Ahead In FY21; Reiterate ADD With Higher Target Price

• Flexible staffing volume came in at a high of 14,347 (+14% y-o-y), stronger than we expected. HRnetGroup's FY20 core profit above our/consensus forecasts.
• Jobs Growth Incentive (JGI) could potentially lift our HRnetGroup's FY21F core profit forecast of S$47.9m by 2.8%-28.3%.
• Reiterate ADD on HRnetGroup, with a higher target price of S$0.70, as hiring activities accelerate in FY21F from job creation.
• HRnetGroup has net cash of S$332m as of end-Dec 20.

HRnetGroup's FY20 revenue in line, while core profit beat expectations

• HRnetGroup (SGX:CHZ) reported an FY20 revenue of S$433m (+2.4% y-o-y), the highest since its listing and in line/above our/consensus’ expectations, forming 103%/107% of full year-forecasts. FY20 core profit came in flat y-o-y at S$45m (+0.1%), but was above our/consensus expectations, at 119%/124% of full-year forecasts, helped by greater cost reduction of S$6.7m, mainly from lower employee profit-sharing incentives and selling expenses. See HRnetGroup's announcements.
• Flexible staffing volume was stronger-than-expected at 14,347 (+13.7% y-o-y; CGS-CIMB: 12,400), while permanent placements were in line with expectations at 7,022 (-17.7% y-o-y; CGS-CIMB: 7,200).
• HRnetGroup saw increased contributions from the healthcare/government sectors, which grew 14%/17% y-o-y in FY20.

We maintain our positive job market outlook for FY21F across HRnetGroup’s key markets

• Key takeaways from the FY20 earnings call with HRnetGroup's management include:
  1. employers in Singapore are increasingly looking at a hybrid recruitment model in FY21F,
  2. government and healthcare sectors remain bright spots for recruitment, while e-commerce and logistics should see some uptick in FY21F, and
  3. permanent placement outlook is positive for China, while Hong Kong continues to face headwinds in North Asia segment for FY21F.
• We understand from our conversation with HRnetGroup's management that employers in Singapore are increasingly looking to adopt a hybrid recruitment model for middle to senior positions (salary range of S$5,000-S$15,000 per month), where they choose to hire them as contractors (flexible staffing) and having an option to convert them full-time in the future, from which HRnetGroup will earn a conversion fee. This is in line with our expectations that recruitment volume will still largely be kept variable in FY21F as employers remain cautious on the back of uncertainties caused by the pandemic.
• We raise our expectations for flexible staffing volume to 15,200-15,300 for FY21-22F (previously 13,100-13,500), and we introduce our FY23F forecasts of 15,500 for this segment. However, we cut our permanent placement volume forecasts to 8,000-8,400 for FY21-22F (previously 8,600- 9,000) and introduce our FY23F forecast of 9,450.
• We expect the average revenue per permanent placement to gradually improve from S$11,050 in FY21F to near pre-COVID-19 levels of S$11,300 in FY23F, on the back of supportive government policies as the gradual recovery of the economy should see acceleration of more full-time hires, in our view. We believe that flexible staffing demand should remain strong in FY21F as employers will continue to keep their headcount variable. However, we also expect the average revenue per contractor to taper down slightly to S$24,500 in FY21F, gradually recovering to S$25,200 by FY23F (near pre-COVID-19 levels), in tandem with the expected economic recovery.
• Recall in our previous report HRnetGroup - CGS-CIMB Research 2021-01-18: Optimism Among Employers For 1Q21, our conversations with recruiters and headhunters in Singapore and China reaffirmed our positive job market outlook for 2021F, and we have noted a strengthening in hiring outlook across HRnetGroup’s key markets of Singapore and North Asia (except Hong Kong). Recruiters in Singapore whom we spoke to back in Jan 2021 generally believe that hiring activities will be stronger in 2021F (vs. pre-COVID-19 levels in 2019), and we continue to expect Singapore employers to keep their headcount variable until their earnings stabilise, on the back on ongoing uncertainties from the pandemic.
• HRnetGroup’s key markets also reported positive net employment outlooks for 1Q21F, with Singapore reporting its strongest net employment outlook in six years of +15%, according to ManpowerGroup’s global employment outlook survey for 1Q21F. The net employment outlook is derived by taking the percentage of employers anticipating total employment to rise and subtracting the percentage expecting a decrease at their location in the next quarter.

More job creation from Singapore Budget 2021

• HRnetGroup's management believes that the Jobs Growth Incentive (JGI) announced during Budget 2021 could help drive permanent placement volume for FY21F. We also expect employers to have compelling reasons, backed by supportive government policies, to bring forward their plans to hire in 2021F, which could serve as tailwinds for permanent placement volumes as well.
• Phase 2 of the JGI targets to support the recruitment of 200,000 locals (Singapore citizens and permanent residents) in 2021F, with an infusion of S$5.2bn, according to Singapore’s Budget 2021 announced on 16 Feb 2021. In Phase 2, the JGI will be further extended from Mar 2021 to Sep 2021 (Phase 1: Sep 2020-Feb 2021). Eligible employers will receive salary support from the government for:
  • up to 25% of the first $5,000 for 12 months for non-mature local hires, and
  • up to 50% of the first $6,000 for 18 months for mature workers, persons with disabilities and ex-offenders, according to the Inland Revenue Authority of Singapore (IRAS).
• While no quantitative guidance was provided by management, we estimate that JGI could potentially lift our core profit forecasts for HRnetGroup by 2.8%- 28.3%, translating into a 9.4%-36.5% y-o-y growth in FY21F. We have assumed that 55% of permanent placement volume is derived from Singapore and that HRnetGroup could achieve 8,000 permanent placements (+13.9% y-o-y) in FY21F, translating into 4,400 placements from Singapore. This represents 2.2% of the total targeted hiring of locals (200,000) market share from Phase 2 of the JGI.
• Assuming all other variables remain unchanged and HRnetGroup could capture up to an additional 1% pt (from the current 2.2% to 3.2%) of the targeted hiring of locals, we estimate incremental permanent placement volume from Singapore of 200 for every 0.1% pt increase in market share. This could potentially translate into incremental profits of S$1.4m to S$13.6m from our current core profit forecasts of S$47.9m for FY21F.
• See report attached below for scenarios of JGI's impact to our estimates on HRnetGroup’s FY21F core earnings.

Reiterate ADD on HRnetGroup with a higher target price of S$0.70

• We raise our HRnetGroup's FY21F-22F earnings per share forecast by 3.6%-4.9% to factor in higher volume for the flexible staffing business as well as expect HRnetGroup to maintain a close watch over operating expenses in the midst of the ongoing pandemic.
• Our target price for HRnetGroup increases to S$0.70, now pegged to 14.0x FY22F P/E (previously 13.2x FY21F P/E), which is the average of its 3-year historical mean as we think a positive job market outlook, with supportive government polices (JGI), should help spur hiring activities to pre-COVID-19 levels (average P/E between Jun 2017 and Dec 2019 was 16.1x).
• See HRnetGroup Share Price; HRnetGroup Target Price; HRnetGroup Analyst Reports; HRnetGroup Dividend History; HRnetGroup Announcements; HRnetGroup Latest News.
• Currently, HRnetGroup's share price trades at 11.6x forward FY22F P/E (close to 1 standard deviation below its 3-year historical mean and a ~47% discount to listed peers. See peer comparison table in report attached below). We think the stock has priced in the weak sentiment from COVID-19 in FY20, and we believe FY21F is a fresh start for HRnetGroup.
• Catalysts include synergistic M&As and more job creation.
• Downside risk is deteriorating macro conditions.
• HRnetGroup has a net cash position of S$332m as of end-Dec 20; we forecast FY21F-22F dividend yields of 4.1%-4.3%.

Darren ONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-03-01

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