Analysts Kenneth Tan and Lim Siew Kee have lowered their target price from $1 to 80 cents, based on a 13x FY2024 P/E, 0.5 standard deviation below FY2017-FY2022 mean, as they anticipate greater earnings uncertainties.

Tan and Lim expects Singapore to record a lacklustre gross domestic product growth of 1.3% y-o-y in 2023, given trade headwinds from a global slowdown. This is a key risk to the volume of jobs that HRnet can match, they say.

“Key exports declined steeply (-15% y-o-y) for the eighth consecutive month in May as electronics exports came in weak. While the unemployment rate remained low at 1.8% (as at 1QFY2023 ended in March), the job vacancies to unemployed persons ratio declined q-o-q to 2.28, signalling that labour market tightness has started to ease, in our view.” the analysts say.

In addition, Tan and Lim say that the pace of recovery in China, which is one of the company’s key markets, looks uncertain. They note that HRnet said in its FY2022 annual general meeting that its China operations were “severely impacted in 1QFY202” due to challenges in building business pipelines.

The latest China economic data released in June also seems to corroborate with this, with both industrial output and retail sales falling short of Reuters consensus expectations.

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“We turn more bearish on the pace of recovery as HRnet’s China operations are mostly focused on clients in the industrial and technology sectors, which we view as vulnerable to the ongoing slowdown in global demand.” the analysts conclude.

Finally, Tan and Lim highlight downside risks to their permanent placement volume assumptions as employers turn more cautious amidst weakening macroeconomic conditions and the weaker-than-expected labour market recovery in China.

They also expect slower average placement revenue growth, despite rising wages, due to lower contribution from the technology and semiconductor industries which typically command higher salaries as compared to sectors such as retail and travel.

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“While resilient flexible volumes and further recovery in travel related revenue should help, we believe these are insufficient to offset the earnings impact from weaker perm. As such, we cut our FY2023-FY2025 permanent placement revenue by 4%-6%; this reduces our earnings per share forecasts by 4%-8% due to the lower margin mix.” they add.

As at 12.40pm, shares in HRnet are trading flat at 77.5 cents.

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