HRNETGROUP LIMITED (SGX:CHZ)
HRnetGroup - Hire Returns; Initiate Coverage With BUY
- HRnetGroup (SGX:CHZ) is one of the largest recruitment agencies in Asia-Pac ex-Japan with an asset-light, net-cash (S$332mn) and high-return (FY21e ex-cash ROE of 152%) business.
- Economic recovery to revive employment in key service sectors. Higher contract volumes and rates expected for both permanent recruitment (PR) and flexible staffing (FS) solutions.
- HRnetGroup trades at 16.2x P/E against peer average of 24.4x, even though it is the most profitable employment agency in town. After net cash of S$332mn, it trades at ex-cash P/Es of 9.2x/8.9x on FY21e/22e EPS.
- We initiate coverage on HRnetGroup with BUY and a target price of S$1.00, set at 14x FY21e ex-cash P/E.
HRnetGroup - Company Background
- Listed on the main board of the SGX on 16 June 2017, HRnetGroup (SGX:CHZ) is the largest recruitment agency in Asia, ex-Japan.
- HRnetGroup has over 900 consultants in 13 Asian cities. Singapore is its stronghold, contributing 54.5% to its FY20 gross profit. Permanent recruitment (PR) generated 56% of its FY20 gross profit and flexible staffing (FS), 43%. Other services include payroll processing and outsourcing of recruitment processes.
HRnetGroup's non-current financial assets
- HRnetGroup's non-current financial assets comprise two investments: Staffline Group (STAF LN) and Bamboos Health Care Holdings Limited (2293 HK).
- Staffline is one of the UK’s leading recruitment and training providers. With a blue-collar recruitment market share of 10%, Staffline has more than 60,000 FS contractors who can be deployed to clients daily. Staffline holds the largest market share of 21.2% in Northern Ireland through its Recruitment Ireland business. Staffline’s share price plunged at the start of 2019 due to internal issues and one-off items on its P&L. This provided HRnetGroup with an opportunity to enter at distress valuations.
- HRnetGroup invested S$55.5mn in Staffline for a 29.95% stake in 2019 (S$46.3mn for a 25.02% stake in July 2019 and another S$9.2mn for a 4.93% stake in September 2019).
- Based in Hong Kong, Bamboos offers healthcare staffing services, including private nursing and institutional healthcare staffing solutions. The owner of this business is an ex-senior nurse. In April 2019, HRnetGroup invested S$8.45mn for an 8.19% stake. With a talent pool of over 20,000 healthcare personnel, Bamboos serves as a trusted strategic advisor to HRnetGroup’s clients, which include hospitals, social service organisations, clinics, pharmaceutical companies and individuals who need customised healthcare staffing services.
HRnetGroup - Investment Merits
Most profitable of them all.
- As a human-resource business, HRnetGroup's operations do not require much PPE (property, plant and equipment). High ex-cash ROE (return on equity) are attributable to HRnetGroup’s strong income-generating business, which is built on scale, little PPE and reputable brands, led by an experienced management team which is skilful in identifying talents.
- While employees are incentivised to be productive, HRnetGroup has also been controlling costs as well. Reflecting this, it has been able to generate steady and consistent gross and net margins of 30-36% and 11-13% respectively. These tower above the net margins of its key regional competitors, which range from -17% to 7%.
- According to an independent market research report by Frost & Sullivan, HRnetGroup is the largest employment agency in Singapore, with a 20.5% market share based on 2015 revenue.
- In HRnetGroup’s latest compilation of ACRA company filings in February 2019, it maintained its position as the largest and most profitable recruitment service player in Singapore.
High barriers to entry for FS and scale barriers for PR.
- Complementing each other, permanent recruitment (PR) performs well during economic expansion while flexible staffing (FS) protects HRnetGroup during downturns. Creating scale in both trades is not easy.
- FS faces high barriers to entry as it requires a lot of liquid capital. Contract employees are frequently paid upfront before clients’ reimbursement. Therefore, a strong balance sheet is required to be able to initiate and grow this business.
- On the other hand, PR faces high barriers to scale. To increase volume, PR firms need to be able to manage and train batches of headhunters effectively. It took HRnetGroup years to find a golden methodology for its PR business.
- Since listing, HRnetGroup has grown rapidly in fast-growing economies. This has given HRnetGroup a greater catchment of candidates, allowing it to provide more staff and increase contract volumes.
Turnaround in hiring.
- A turnaround in the Singapore economy led to a rebound in employment in key service sectors in 4Q20 and 1Q21. Mirroring this, 18,700 and 17,600 new service jobs were created, led by renewed hiring by the F&B, community, social and personal service industries. Unemployment rates in Singapore dwindled from their high of 3.5% in September 2020 to 2.9% in March 2021. This signals improved hiring confidence among employers, which we believe will boost the volume of HRnetGroup’s permanent recruitment (PR) business. Billing value per PR placement has also been climbing for HRnetGroup. This reflects companies’ demand for quality employees to be filled on short notice as soon as they are out of their hiring freezes.
- In the flexible staffing (FS) business, there has been an equal spurt in both rates and volumes. This is led by companies requesting for more roles to be filled on temporary or short-term contracts.
- ManpowerGroup’s Employment Outlook for 2021, which is a survey of over 45,000 employers in 43 countries, found that hiring optimism is only tempered by the highest level of global talent shortages in 15 years. About 69% of the employers polled reported difficulties in filling vacancies. Even for mid-senior level roles, some are filling C-suite executives on an interim basis before possible conversion after 6-12 months. Given that some foreign workers are unable to return from their hometowns due to the pandemic and tightened rules for foreign hiring in Singapore, rates offered for FS roles have increased. We are expecting the FS growth spurt to offset the slack in other income, as some pandemic-related government schemes taper off.
Pursuing growth in North Asia.
- With a cash hoard of S$332mn, HRnetGroup is well positioned to explore any interesting North Asian expansion opportunities. In the past three years, HRnetGroup has been actively growing in Asia. We expect HRnetGroup to continue its expansion in North Asia, especially in China where its economy remains robust. China’s GDP grew by 18.3% in 1Q21. In 2021, China is planning to create 11 million jobs. HRnetGroup can grow organically through an expansion of its brands into new markets or through acquisitions.
- HRnetGroup will typically explore a new market in the more cash-generative permanent recruitment (PR) business first, before introducing flexible staffing (FS) solutions which consume more cash. For M&A growth opportunities to be considered, it has three criteria.
- The target’s PR business must have at least 30 consultants in one location, with a presence in first-tier Asian growth cities or cities where HRnetGroup has a presence in.
- The target’s FS business must have at least 1,000 contractors in one location, with a presence in a first-tier city in China or Japan.
- The target should be able to contribute to HRnetGroup’s earnings immediately and returns on capital invested should be above the industry average.
- For PR acquisition targets which are smaller than HRnetGroup, HRnetGroup is inclined to acquiring a majority stake, requiring existing management to invest in the business for co-ownership. This is such that all parties are on the same page to grow the target company. HRnetGroup will only consider a 100% buyout for FS acquisitions if the targets have existing contracts. Otherwise, HRnetGroup will try to acquire FS businesses through earnout agreements. It eliminates uncertainty for HRnetGroup as they only pay a portion of the sale price upfront. The remainder is based on future performance.
- For companies that are larger, HRnetGroup will try to acquire at least 20% of the target to collaborate in mutual areas of interest, such as its investment in UK-based Staffline Group.
HRnetGroup - Risks
COVID-19 relapses to slow recruitment demand.
- In FY20, HRnetGroup’s gross profit dropped due to hiring freezes for permanent placements amid COVID-19. This was mitigated by growth in flexible staffing. A prolonged COVID-19 pandemic could stall economic recoveries in the regions where HRnetGroup operates, affecting its ability to retain or add clients and financial performance.
Competition.
- Permanent recruitment (PR) has low barriers to entry for new entrants given that it does not involve a highly skilled workforce or large capex for fixed assets. Customers can switch to other competitors easily as service differentiation is not significant. As such, the PR sector remains competitive. HRnetGroup may face price pressures from existing and new competitors.
- To mitigate this, the offering of flexible staffing (FS) to complement PR has been vital to attract and retain customers. HRnetGroup also has a long-standing relationship of over 10 years with many of its key clients.
Forex.
- HRnetGroup has several overseas subsidiaries which provide profits in their local currencies. It thus has FX exposure to the US$, £, ¥, HK$ and RMB. However, FX risks are hedged through investments grade bonds, fixed deposits and FX structured deposits.
HRnetGroup - Valuation & Recommendation
We initiate coverage of HRnetGroup with a BUY and target price of S$1.00.
- HRnetGroup has been generating higher ROEs than most of its regional and global recruitment peers. Yet, it trades at 16.2x FY21e P/E, far below its peer average of 24.4x. Stripping out net cash of S$332.2mn, HRnetGroup trades at ex-cash P/Es of 9.2x/8.9x on FY21/22e EPS.
- Our target price is set at 14.0x FY21e ex-cash P/E (net of interest income after tax). In 2019 and 2020, HRnetGroup's share price suffered from a weaker hiring environment amid ongoing trade wars and COVID-19.
- See
- With the worst likely over for HRnetGroup, we expect HRnetGroup to perform on the back of a recovering labour market. Historical high of HRnetGroup’s ex-cash P/E is ~14x.
- Equipped with a debt-free balance sheet and strong cash generation, we are anticipating growth from potential M&As.
- See report attached below for complete analysis on HRnetGroup (SGX:CHZ). The report is produced by Phillip Securities Research under the ‘Research Talent Development Grant Scheme’ (administered by SGX).
Tan Jie Hui
Phillip Securities Research
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https://www.stocksbnb.com/
2021-07-16
SGX Stock
Analyst Report
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