SINGAPORE (May 14): DBS Vickers Securities is downgrading its call on HRnetGroup to “hold” from “buy” with a lower price target of 85 cents compared to $1.05 previously on expectations of a weaker Singapore jobs market, which is believed to drag on the group’s earnings growing forward.

The research house is now anticipating FY19F core earnings to decline due to lower productive headcount (PHC), weaker jobs outlook for professional placement, and a loss of demand from fintech companies in Singapore.

As such, DBS has reduced its earnings projects and valuation peg to 11 times from 15 times previously on ex-cash earnings, which implies 16 times FY19F P/E.

In a Monday report, analyst Alfie Yeo notes that peers’ forward P/E valuations have also de-rated from 18-22 times to the 15-17 times range, and says he sees limited upside to HRnetGroup in line with the lower market valuation.

To recap, HRnetGroup posted 1Q19 core earnings of $13.7 million for 1Q19, down 16% y-o-y and below DBS’s estimate, with gross profit declining due to lower revenue from flexible staffing and other fee-based services such as the group’s provision of payroll services.

This was largely attributed to a slowdown of use of flexible staffing in Singapore’s fintech sector, where recent developments have seen Uber consolidating into Grab as well as exits of bike-sharing companies such as Ofo, obike and Mobike.

With the latest 1Q earnings disappointment, Yeo believes Singapore’s slowing GDP growth is likely to contribute to a weaker job vacancy-to-unemployed ratio in the coming quarters as well.

“As Singapore’s gross profit contribution [to HRnetGroup’s overall gross profit] is significant at 51%, a weaker job vacancy to unemployed outlook should put pressure on the group’s earnings growth going forward. In addition to Taiwan’s weakness, which is the second highest North Asian market contributor, the drag on growth would be even more severe,” says the analyst.

“Nonetheless, China and Hong Kong are growing, but we believe growth in both markets is insufficient to mitigate the weakness in Singapore,” he adds.

As at 10:51am, shares in HRnetGroup are trading 0.66% lower at 76 cents, or 14 times FY19F book value.