How do you demonstrate that your company, more so than your competitors, is worth investing?
One of the key areas to consider is through a company’s track record. A strong track record of growth means that investors are not taking a huge leap of faith. Its reputation is built from tangible proof of good financial performance. In short, track record is reputation based on work already done.
And HRnetGroup (SGX:CHZ) has 27 years of that.
While investors are running for cover during this economic downturn, I feel that we should not forget that this company has survived several crisis from the start and has always emerged stronger from it.
Company Overview
HRnetGroup is the largest Asia-based recruitment agency in Asia Pacific (excluding Japan) with dominance in Singapore.
The company is relying on 2 growth engines with complementary businesses. Professional and temporary flexible staffing.
The combination of providing temporary and permanent recruitment solutions allows HRnetGroup to foster deep relationships with their corporate customers. They are able to provide comprehensive recruitment and staffing solutions across junior to senior positions.
Also, their flexible staffing business provides a relatively stable and steady revenue stream in economic downturns as compared to our professional recruitment business, while the professional recruitment business generally performs well during periods of economic growth.
Financial Performance
1H20 Results
Despite the doom and gloom, recent results have shown that HRnetGroup is quite a resilient business.
Income Statement
Topline remained around the same levels as previous year but net profit fell 10.7% excluding loss on revaluation of financial assets. Revenue from Flexible Staffing increased 7.1% while Professional Recruitment fell by 27.2%.
Flexible Staffing remains the main revenue contributor at 82.8% but proportion of gross profit from FS is only 43.1%. This is mainly because of the decrease in professional recruitment business which has much higher margins compared to flexible staffing. This explains the larger drop in net profit compared to its topline.
Balance Sheet
HRnetGroup continues to have a strong balance sheet.
No debt and Cash per share is about $0.28 per share (>50% of current share price).
Cash Flow Statement
One thing I like about HRnetGroup is their cash generating capabilities. Since 2014 (that is the earliest financial reports I could find), they have been FCF positive. Currently, they generate about $0.06 in FCF per share, giving them alot of potential to increase their dividends in the future (current dividend is $0.0285).
Valuation Ratio
| Fiscal Period | Dec-14 | Dec-15 | Dec-16 | Dec-17 | Dec-18 | Dec-19 | Jun-20 |
| ROE % | 26.44 | 31.32 | 40.77 | 20.85 | 14.92 | 15.51 | 15.32 |
| ROA % | 17.4 | 20.02 | 22.32 | 14.93 | 12.31 | 12.49 | 11.58 |
| ROIC % | 188.89 | 237.55 | 165.79 | 76.64 | 64.08 | 41.35 | 15.23 |
| Gross Margin % | 39.64 | 36.85 | 36.37 | 34.7 | 36.24 | 34.4 | 27.07 |
| Operating Margin % | 14.06 | 14.18 | 17.07 | 13.83 | 14.98 | 13.18 | 3.89 |
| Net Margin % | 10.28 | 10.73 | 11.25 | 10.55 | 11.24 | 12.2 | 11.45 |
| FCF Margin % | 12.19 | 13.64 | 14.43 | 8.76 | 11.64 | 13.71 | 35.5 |
| PE Ratio | 16.89 | 16.88 | 12.33 | 15.47 | |||
| PB Ratio | 2.49 | 2.42 | 1.91 | 1.65 | |||
| Price-to-Tangible-Book | 2.49 | 2.46 | 1.95 | 1.68 | |||
| Price-to-Free-Cash-Flow | 22 | 16.33 | 10.86 | 6.34 | |||
| Price-to-Operating-Cash-Flow | 22 | 15.69 | 10.68 | 6.26 | |||
| EV-to-EBITDA | 8.11 | 7.86 | 5.18 | 3.35 | |||
| EV-to-EBIT | 9.38 | 7.98 | 5.68 | 3.86 | |||
| Dividend Yield % | 0 | 0 | 0 | 0 | 2.88 | 4.48 | 5.66 |
Both HRnetGroup’s ratios and margins tell you that it is one of the better businesses listed in Singapore Exchange. Its asset light business model has allowed it to maintain a high ROE and net margins over the years.
Track Record
Yes, this company has shown a decrease in financial performance recently. Yes, this company has what currently seems like a poor investment decision in buying Staffline PLC shares at GBP150 per share. Everyone makes mistakes, Warren Buffet sold airlines stocks but they gave me >100% returns. Jim Chanos shorted Tesla stock last year and it hurt him bad.
If anything, HRnetGroup’s history tells us that they are able to learn from their mistakes and move on from it. From the first day of business in 1993 to 2019, they have revenue and profit growth at CAGR of approximately 28% and 33% respectively.
Despite the current economic downturn, they are still able to churn out profits and add $20mil into their coffers in the first 6 months of 2020.
This company has survived 4 major financial crisis excluding the one we are currently facing right now. During the 2008 financial crisis, their profit fell more than 50% from the high 20s to less than $10mil. Look where they are now. I know that the past does not guarantee future performances, but this is proof of their resiliency and strong position in the recruitment solutions industry.
Takeaway
HRnetGroup is a very resilient business and they have come a long way since its start in 1993. Its track record of the past 27 years has proven to us that they have a very high chance of surviving this economic downturn and resume their growth plans.
They are in a very strong financial position to seek out strategic acquisitions as well as expanding organically to further entrench themselves in the industry.
From their commentary, 2H20 will be a poor half as unemployment rates continue to stay high. Assuming that they were able to get back on track to growth in 2021. Their EPS should be in the range of $0.04-$0.045. Assigning a PE multiple of 13x, the target price should be ranging from $0.52 to $0.585.
Business risks include a prolonged global economic downturn and political turmoil (like in Hong Kong) which may have an adverse impact on their business operations. Low barriers to entry to its business may also cause competitive pricing and losing market share to their competitors.
Cheers
The Moss Piglet is vested in HRnetGroup at an average price of $0.48.