HRnetGroup - DBS Research 2022-09-16: Homing In On Hot Jobs; Re-instate Coverage With BUY

HRnetGroup - Homing In On Hot Jobs; Re-instate Coverage With BUY

  • Reinstate coverage on HRnetGroup (SGX:CHZ) with BUY recommendation and target price S$1.08, or 39% upside.
  • The labour market in Singapore remains tight and we think that HRnetGroup is well poised to benefit as a dominant player in a fragmented market. Although the overall macroeconomic outlook has weakened, HRnetGroup has proven its ability to navigate economic downturns with its twin engines and diversified business.
  • Moreover, HRnetGroup's current valuation at 11.5x FY23F P/E with ~S$313m in cash (~40% of market cap) remains attractive; and we believe that its strong cash flow generation should support its dividend payments.

(1) Singapore job market still tight despite global headwinds

Singapore’s labour market likely to stay resilient in 2H22, albeit slowing growth in resident employment.

  • According to the Ministry of Manpower (MOM), total employment was up 66,500 in 2Q22 compared to 42,000 in 1Q22 with substantial growth observed in the construction and manufacturing sectors. 2Q22 advance estimates indicate that resident employment has already surpassed pre-COVID levels by 4%.
  • While residents continued to secure jobs, particularly in growth areas such as information and communications, professional services, and financial services, resident employment will likely experience relatively slower growth going forward as the readily available resident labour supply shrinks on the back of the improving unemployment situation.
  • Macroeconomic headwinds could also lead to subdued growth going forward.

Job vacancies expected to stay elevated in 3Q22, a positive for HRnet.

  • Job vacancies in Singapore are at record-high levels of 126,600 as at 2Q22. Hiring is expected to remain robust with 69% of companies indicating that they plan to hire more staff in 3Q22.
  • Generally, HRnetGroup’s revenue has coincided with the job vacancy levels. A larger available pool of jobs indicates more opportunities for HRnetGroup to increase its permanent placements and contract positions, contributing to revenue growth.

Riding on the “Great Reshuffle”; higher demand for recruitment services whilst boosting gross profit per placement.

  • The Great Resignation has evolved into the Great Reshuffle, with more individuals changing jobs rather than leaving the workforce. At the same time, job vacancies have increased on the back of the recovering labour market. The job vacancy-to-unemployed person ratio is currently elevated at 2.5x in 2Q22, the highest since 1998.
  • With more jobs than available workers, potential employees may be more selective, and it may take employers a longer time to woo employees. This may in turn increase the demand for recruitment services as companies outsource the time-consuming multi-stage recruitment process.
  • Moreover, the Great Reshuffle has led to salary increases, boosting HRnetGroup’s gross profit per placement by 20% in 1H22. We are keeping a lookout on wages as m-o-m’s 2Q22 advanced estimates show that fewer companies intend to raise wages (28% in June 2022 vs 31% in March 2022).

China’s slowing economy could lead to muted growth for the North Asia segment.

  • Despite jobless rates falling to 5.4% in July (vs. 5.5% in June), unemployment insurance pay-outs in China hit a record high of $37.19bn yuan in June, and the youth employment rate surged to record levels of 19.9% in July. China’s job vacancies-to-job applicants’ ratio has also declined to 1.37 in 2Q22 compared to 1.57 in 1Q22.
  • Thus far, HRnetGroup's revenue from the North Asia segment has grown 28.4% y-o-y and 8.2% h-o-h in 1H22. However, sluggish external and domestic demand could exert additional pressure on the job market, dampening the growth of HRnetGroup’s North Asia segment going forward.
  • On the bright side, China’s fiscal and monetary policies could further stabilise the labour market, and HRnetGroup’s ability to pivot to growth areas could also help cushion the impacts from the slowdown. However, increased market expectations of a recession may weigh on sentiment.
  • Overall, there has been a deterioration of the external economic environment, aggravated by surging inflation and the ongoing Russia-Ukraine crisis.
  • Although the risk of a recession in Singapore is presently low, we are cognisant that the uncertainty surrounding the macroeconomic conditions may cool labour demand as companies tone down hiring plans in light of diminishing output levels. Nevertheless, we expect HRnetGroup to be more resilient, given its ability to navigate economic downturns.

(2) Ability to navigate economic downturns with twin engines and diversified business

Highly resilient business, enabling HRnetGroup to weather economic downturns.

  • The twin pillars of growth, namely Professional Recruitment (PR) and Flexible Staffing (FS), enable HRnetGroup to ride out periods of economic contractions. HRnetGroupt’s professional recruitment segment is more sensitive to business cycles, given its involvement in permanent placements. On the other hand, HRnetGroup’s flexible business segment is relatively more resilient to recessions, as it provides staffing solutions for corporate clients seeking variability in operating costs and talent deployment.
  • In recessionary periods, corporate clients may prefer to hire staff on a contract or temporary basis, which offers corporates with higher flexibility to deal with the changing business conditions. We believe that the highly complementary twin engines make the business model highly resilient, enabling HRnetGroup to weather economic downturns whilst benefitting from economic growth.

Strong ability to pivot across sectors, helmed by unique ownership model.

  • HRnetGroup enjoys revenue from both defensive sectors such as healthcare life science and government as well as growth sectors such as IT & tech and financial & insurance. During the IT boom in 2017, HRnetGroup quickly adapted its business and increased its revenue contributions from the IT sector from 14% in FY16 to 18% in FY17. This was aided by a business alliance agreement with TechnoPro Holdings – Japan’s largest technology-focused staffing company.
  • Owing to its highly diversified business, HRnetGroup was also able to quickly pivot to the healthcare life science segment, as there was high staff demand at testing and vaccination centres in 1H21. Consequently, revenue contributions from the healthcare life science segment jumped from 14% in 2H20 to 26% in 1H21.
  • With COVID-19 largely in an endemic phase, revenue contributions from healthcare have moderated down to 22% in 1H22.
  • Nonetheless, pockets of growth still exist in areas such as digitalisation, wealth banking, and luxury retail. We think that HRnetGroup is well poised to manoeuvre those growth areas due to its co-ownership model. With greater skin in the game, its 36 business leader co-owners are incentivised to respond quickly to market trends, paving the way for HRnetGroup to deliver above-GDP growth rates.

Diversified business with quality client base.

  • In addition, HRnetGroup boasts a quality client base, with the top 5 clients engaging their services for an average of 15 years. Moreover, concentration risk is mitigated by having a diversified client base, with the top 5 and top 10 clients contributing 19.9% and 26.6% of revenue, respectively.

(3) Largest recruitment group in Asia (ex-Japan) with more room to grow

Dominant player in a fragmented market.

  • HRnetGroup operates in 15 cities across Asia. In Singapore, where it derives 70% of its revenues and 56% of its gross profit (based on FY21 filings), HRnetGroup has the largest market share by revenue.
  • The size and scale at which HRnetGroup operates allows it to enjoy pricing power alongside reputable branding to attract quality clients and high-calibre candidates.

Earnings growth to be led by expansion in new and existing markets.

  • HRnetGroup has expanded its operations from 10 cities since its IPO to 15 cities currently. The 15 cities that it operates in include Singapore, Kuala Lumpur, Hong Kong SAR, Taipei, Tokyo, Shanghai, Bangkok, Beijing, Seoul, Guangzhou, Jakarta, Suzhou, Shenzhen, Chengdu, and Kaohsiung.
  • Despite the relatively mature market in Singapore, management has also indicated that there are still further areas of growth, particularly in large contracts with government agencies and corporate clients.
  • Just this year, RecruitFirst, a subsidiary of HRnetGroup, has announced two contract wins – a four-year contract with the Ministry of Education and a two-year extendable contract with Singapore General Hospital. We believe its size and public-listed status could have given its clients more confidence in the firm, enabling it to clinch contracts, particularly with government agencies.
  • Moreover, we also believe that the North Asia segment, which has a focus on the semiconductor industry, will benefit from the long-term structural uptrend of the semiconductor industry.

Growth by acquisitions a possibility given war chest of cash.

  • Given HRnetGroup's huge cash hoard of $312.7m with no bank borrowings as at 1H22, we think that there is potential for accretive acquisitions. Based on our read on management’s intentions, we believe HRnetGroup could be looking at acquisitions, particularly in areas such as IT and digitalisation, where they do not have a specialisation.
  • Should there be a need to raise more cash, we believe equity fund-raising could be a potential and eventual funding option, post the use of its cash, as long as the deal mechanics and valuation are accretive and beneficial for the existing shareholders.
  • In addition, this option could also aid in increasing its free float, which should boost liquidity and trading volumes.

(4) Attractive valuation, share price to be supported by sustainable dividends and 30m share buyback programme

Strong cash position to sustain dividends.

  • HRnetGroup has strong cash flow generation abilities with a relatively asset-light model. Without the need for heavy machinery and equipment, its capital expenditure has been minimal.
  • HRnetGroup also has a lean operating model where ~80% of its staff are fee earners.
  • We project HRnetGroup to remain in a strong net cash position, given its cash generative business. Being cash flow generative and given its strong balance sheet, we think that HRnetGroup should be able to sustain its dividend practice of paying out at least 50% NPAT (net profit after tax), if not more, after adjusting for exceptional items.
  • In addition, HRnetGroup has given out a special dividend in FY21 and a maiden interim dividend in 1H22. We are positive on this move, as it indicates receptiveness to feedback from the market. See HRnetGroup's Dividend History.

Share buyback to return profit to investors.

Reinstate coverage on HRnetGroup with BUY rating and target price of S$1.08.

  • Our target price for HRnetGroup is based on the mean of its peers’ ex-cash P/E at ~11.5x.
  • Currently, HRnetGroup's share price is trading at an ex-cash P/E of 7.1x with an estimated cash hoard of S$312.7m (1H22).
  • The job market is still tight in Singapore, hence 2H22 is expected to remain resilient. Though an increased risk of a recession may weigh on sentiment, we like HHRnetGroupnet for its resilient and diversified business that allows it to navigate economic downturns. HRnetGroup's share price trades at an attractive entry point, which gives rise to a forward dividend yield of 4.6%.
  • Key assumptions:
    • Key drivers of earnings growth include the number of professional recruitment placements, employee contractors, as well as gross profit per placement and gross profit per contractor employee. On the back of macroeconomic deterioration, we have forecasted HRnetGroup's revenue to grow by 4.6% in FY22 followed by a relatively more muted growth of 3.0% in FY23.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @

Andy SIM CFA DBS Group Research | Singapore Research Team DBS Research | 2022-09-16
SGX Stock Analyst Report BUY INITIATE BUY 1.08 SAME 1.08

Previous report by DBS Research:
2020-08-13 HRnetGroup - Cautious Outlook As Job Cuts Loom

Target prices by 4 other brokers at HRnetGroup Target Prices.
Listing of broker reports at HRnetGroup Analyst Report.

Relevant links:
HRnetGroup Share Price History,
HRnetGroup Announcements,
HRnetGroup Dividends & Corp Actions,
HRnetGroup News Articles


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