Expansion beyond Singapore should help HRNetGroup mitigate slowdown

Uma Devi

SINGAPORE (Aug 23): Recruitment firm HRNetGroup is expanding into other countries to make up for Singapore’s shortcomings both as a small state as well as in the face of a slowing economy.

The group saw its 2Q earnings fall 11.5% to $11.5 million from $13.0 million the preceding year, on the back of lower margins from its flexible staffing segment.

In particular, the slowing Singapore economy seemed to have contributed significantly to the group’s dismal quarter. As Singapore’s GDP growth slowed to the lowest in a decade, revenue for the quarter increased by a marginal 0.5% to $108.5 million.

Furthermore, gross profit fell 4.3% to $39.8 million, spearheaded by a 10% contraction in gross profit from Singapore on the back of a slowdown in hiring after the end of the unicorn hiring spree.

In the company’s results briefing on Aug 13, group executive director Adeline Sim and chief financial officer Jennifer Kang noted that Singapore was experiencing a contraction in hiring and an uptake in retrenchments, owing to the economic slowdown. 

Gross profit for the professional services segment in Singapore fell by $1.1 million during the quarter, while that for flexible staffing was down $700,000.

See: HRnetGroup casts its net wider as 2Q earnings drop 11.5% to $11.5 mil on Singapore contraction

However, HRNetGroup has been steadily building a presence across a slew of countries. For a start, the group had recently acquired a 25.02% stake in UK-based workforce recruitment and training organisation Staffline for $46.1 million.

The acquisition follows a drastic plunge in Staffline’s share price on the back of internal issues and numerous one-off impacts on the company’s financial figures, which enabled HRnetgroup to swoop in with a distress valuation.

Located in Europe, the acquisition would provide HRNetGroup with access to a larger employment market and clientele base with the possibility of securing bigger global mandates, while tapping on Staffline’s technological competencies. Earnings from this acquisition are expected to kick in from 3Q19 onwards.

See: HRNetGroup goes to Europe with 25% stake acquisition in UK firm

While Europe is a nascent market and apart from sourcing for new contacts in Australia and New Zealand, HRNetGroup has been deepening its presence in Asia, with North Asia forming 45% of overall gross profit for 2Q19, up from the 40% share in 2Q18.

In fact, market watchers are fairly certain that it was North Asia’s growth that helped mitigate the weak performance of Singapore, and will continue to do so by displaying resilient growth into the upcoming 3Q19.

In the latest quarter, hiring from Hong Kong and China, with the inclusion of REForce remained strong, growing 7.5% y-o-y despite macroeconomic uncertainties. China, which is also the group’s second largest market, seems to be a market to watch, although the management remains watchful of current developments in Hong Kong.  

So what do the analysts think?

RHB Research is maintaining its “buy” call on HRNetGroup with a target price of 94 cents, as it believes the worst is over for the group.

“Earnings from the recent acquisition [are] expected to kick in 3Q19, and it should mitigate the drop in HRNetGroup’s core businesses,” says analyst Jarick Seet.

Although Seet notes the business weaknesses in 2Q19 was due to ongoing trade war issues and companies holding off hiring, he expects more potential accretive mergers and acquisitions should mitigate the drop in the group’s core businesses.

Similarly, CGS-CIMB Research is maintaining its “add” on HRNetGroup with an unchanged target price of $1.0, as the group’s 1H19 core net profits accounted for 50% of the research house’s full-year forecasts and it expects a seasonally stronger 2H19 in sight.

“We continue to like the stock for acquisition-led growth for FY19-21F, strong net cash position ($228 million post Staffline investment) and 4% dividend yield,” says analyst Ngoh Yi Sin, adding that rising contribution from overseas markets could be another growth driver.

In addition, the group has a fairly healthy balance sheet with a net cash balance of $228 million, of which $148 million could be used for other acquisitions

As at 3.15pm, shares at HRNetGroup are trading flat at 58 cents or 11.1 times FY19F earnings with a dividend yield of 3.27%, according to CGS-CIMB’s valuations.