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DBS reinstates 'buy' on HRnetGroup amid 'resilient' labour market

Felicia Tan
Felicia Tan9/16/2022 11:30 PM GMT+08  • 3 min read
DBS reinstates 'buy' on HRnetGroup amid 'resilient' labour market
DBS Group Research has given HRnetGroup a target price of $1.08, representing a 39% upside from its current share price of 78 cents.
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DBS Group Research has reinstated its coverage on HRnetGroup with a “buy” call as it sees the group being a beneficiary of the tight labour market in Singapore.

In the 1H2022, Singapore’s job market remains tight with the job vacancy-to-unemployed person ratio at 2.5, the highest in 24 years since 1998. According to the Ministry of Manpower (MOM), which released its labour market report for the 2Q2022 on Sept 14, total employment was up 66,500 in the quarter, compared to the 42,000 in 1Q2022. The higher figures were partly due to the substantial growth seen in the construction and manufacturing sectors.

Resident employment had already surpassed pre-Covid-19 levels by 4%, according to 2Q2022 advance estimates.

However, Sim is expecting to see a slowdown in the growth of resident employment.

“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,” the analyst says. “Macroeconomic headwinds could also lead to subdued growth going forward.”

That said, job vacancies are expected to stay elevated in the 3Q2022, which is a positive for HRnetGroup.

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He adds that job vacancies in Singapore for the 2Q2022 stood at record high levels of 126,600 with 69% of companies indicating that they plan to hire more staff in 3Q2022.

“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,” the analyst says.

As such, he believes the tight labour market should bode well for the group and is likely to continue into 2H2022.

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“Even after a record profit year in FY2021, we project continued growth of 2%/3% for HRnet as a result of it leveraging its dominant position, twin engines, and wide coverage of sectors,” he says.

HRnetGroup, which is currently the largest recruitment group in Asia (ex-Japan), has the “strong ability” to pivot across sectors, especially in pivoting towards the “hot” sectors that require staffing. This, says Sim, is given the group’s unique ownership model and mindset.

“As can be seen during the Covid-19 pandemic, HRnetGroup’s contribution from healthcare grew to 26% in 2H2021, from 11% pre-Covid,” he writes. “Its entrepreneurial mindset in an organised corporate outfit as well as its remuneration cum reward structure enabled it to tide out the downturn and achieve record profits in 2021, which is commendable and provides comfort to shareholders.”

Since its initial public offering (IPO), HRnetGroup has expanded its operations to 15 cities from 10, which could see earnings growth for the group.

“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. Moreover, we also believe that the North Asia segment, which has a focus on the semiconductor industry, will benefit from the structural uptrend of the semiconductor segment,” says Sim. “Its war chest of cash also opens up possibilities for accretive acquisitions.”

In his report dated Sept 16, Sim has given HRnetGroup a target price of $1.08, which represents a 39% upside to the group’s last-closed price of 78 cents. The target price is based on the mean ex-cash P/E of peers at around 11.5x on FY2022/2023 earnings, the analyst explains.

In the analyst’s view, a prolonged recession, resulting in significant weakness in the labour market and falling wages are key risks to the group’s performance.

Shares in HRnetGroup closed flat at 78 cents on Sept 16.

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