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HRNet earnings up but analysts maintain conservative stance

Amala Balakrishner
Amala Balakrishner • 4 min read
HRNet earnings up but analysts maintain conservative stance
“The majority of HRnet’s gross profit exposure is from Singapore and China, with both having a high number of confirmed cases. We therefore expect core earnings for FY20F to shrink by 12% y-o-y before recovering in FY21F,” DBS analysts say.
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SINGAPORE (Feb 28): Earnings of recruitment firm HRNetGroup was up 40.1% to $8.8 million in 4QFY2019, from $6.3 million in the corresponding period a year ago, as it booked one-off gains including from disposal of an investment.

Its substantial increase mitigated the 4.3% contraction in the group’s revenue to $103.9 million for the quarter.

Overall, HRNetGroup’s earnings for FY2019 was up 7.1% from the $48.2 million it logged a year ago.

On a fully diluted basis, earnings per share was 5.13 cents for FY2019, compared to 4.77 cents previously.

The increase is despite a 1.3% drop in the group’s revenue to $423.1 million, which follows a 7.4% drop in contributions from its professional recruitment business.

With the professional services segment accounting for a substantial 66% of the company's gross profit, the decline was key in dragging overall profits. However, this was partially offset by a 1.9% increase in revenue from its flexible staffing business.

“This is typical of economic downturns when flexible staffing revenues are generally more resilient than professional recruitment revenue,” the group notes in a regulatory filing on Feb 27.

Gross profit correspondingly dropped 6.3% to $145.6 million, while gross profit margin softened to 34.4% from the shift towards the lower gross profit margin yielding flexible staffing segment.

The decline was led by an 11.4% contraction in gross profit from Singapore, as the city state saw moderate hiring activity and an uptake in retrenchments from a slowing economy.

In line with this, the group saw a 9.7% reduction in placements for the year to 8,530, from 9,448 in FY2018.

As at December, cash and cash equivalents stood at $76.1 million, down from $136.2 million a year ago due to an increase in payments for operating and investing activities.

Meanwhile, financial assets designated at fair value to other comprehensive income stood at $38.1 million in December. This is as the group is not deemed to have a board seat or significant influence over the UK-listed Staffline, which it had bought a 29.95% stake in 3QFY2019 for $56 million.

HRNetGroup’s board has proposed a final dividend of 2.8 cents, in line with FY2018.

However, the company warns of a weaker outlook as it reels from heightened uncertainty in the business environment amid the novel coronavirus outbreak. “Companies are taking time to reorganise logistics, processes and the flow of people within the organisation,” the group notes.

This, in turn, reduces job vacancies while also impacting revenue recognition from job candidates who have already signed their letter of appointment, but are awaiting confirmation on their start date.

“It appears the pipeline building of our 2Q2020 may be affected [by] how Covid-19 pans out in 1Q2020,” the group says.

This bodes well with CGS-CIMB analyst Ngoh Yi Sin who expects the group to be hit by poorer hiring sentiment, despite the wage credit relief unveiled by Deputy Prime Minister and Finance Minister Heng Swee Keat in his Budget 2020 speech on Feb 18.

Even so, she has slashed her EPS for FY20-21F by 18.6 – 22.5% to reflect a poorer hiring outlook and to remove any associates’ contributions from Staffline.

Ngoh and DBS analyst Alfie Yeo and Andy Sim have posted ‘hold’ calls at a target price of 58 and 63 cents respectively.

“The majority of HRnet’s gross profit exposure is from Singapore and China, with both having a high number of confirmed cases. We therefore expect core earnings for FY20F to shrink by 12% y-o-y before recovering in FY21F,” Yeo and Sim explain.

Meanwhile, Ngoh justifies her stance saying “the near-term uncertainty and poor M&A execution, [which is in turn] supported by its 4-5% dividend yield and strong cash position of $266 million (and zero debt as of end-2019)”.

As at 12.59 pm Shares of HRNetGroup were down 1.72% to 57 cents.

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