SINGAPORE (Nov 2): RHB is initiating coverage on HRnetGroup with a “buy” call and a target price of $1.14.
In a Thursday report, analyst Jarick Seet says that the group is a market leader in recruitment, especially in Singapore, and is able to generate consistent and high gross and net margins, which remained steady at 36.4-39.6% and 11.7-13.3% respectively over the past few years.
According to the analyst, this is far better compared to its listed peers in the Asia-Pacific region excluding Japan, which is highly commendable.
Moreover, the group’s management has been buying shares from the market despite being listed only in June this year. The group last purchased on Sept 29.
"We think this shows a strong vote of confidence by the management, with regards to the outlook of HRnetGroup," Seet says. Currently, the management’s total stake in the company has increased to 74.29%.
“With a net cash hoard of $280 million, coupled with $15-20 million of free cash flows a year and low capex requirements, we believe the company is well positioned to go on an acquisition spree,” says Seet.
The group has also expressed interest in growing inorganically through acquisitions, especially outside of Singapore, with several non-disclosure agreements (NDA) signed.
“We believe it would likely target recruitment firms that are specialised in a specific sector, which would further add an edge and niche to their existing profile. The acquisitions could potentially occur as early as 1Q18 in our view,” adds Seet.
Assuming that the group has a budget of $200 million for acquisitions at an average price-to-earnings (PE) of 10 times, the analyst reckons it could add another $20 million to its net profit after tax (NPAT).
The stock is currently trading at 2018F PE of 18 times compares to the peer average of 16.7 times, but ex-cash, it’s trading at 2018F PE of 11x.
In addition, the group has implemented the 88GLOW Plan which has helped reduced minority interest to 6.4% after IPO from about 18% by allowing a swap with shares in its subsidiaries.
As a result, the analyst expects the group to perform much stronger in 2H17 as this would provide a boost to the group’s profit after tax and minority interests (PATMI).
“We think this gem, trading at below its IPO price of 90 cents is a bargain at these levels, and with many catalysts incoming, we believe HRnetgroup has a high chance of rerating,” says See.
In a separate SGX filing today, the group announced that investors may now invest in its shares via their Central Provident Fund (CPF) ordinary accounts.
The shares acquired through CPF may only be disposed of through trading on the SGX-ST, and any proceeds resulting from such disposals will be credited back into investors’ respective CPF ordinary accounts.
As at 12.00pm, shares in HRnetGroup are trading 1 cent higher at 88 cents, or 2.86 times FY17 book value, with a dividend yield of 2.3%.
