5 Things Investors Should Know About HRnetGroup Ltd’s Business

Listed in 2017, HRnetGroup Ltd (SGX: CHZ) is an recruitment agency headquartered and founded in Singapore that has agencies across Asia. According to report by Singapore Exchange, HRnetGroup was the 5th best-performing stock so far in 2018, returning 19.1%.

It was also listed as one of the top 30 best stocks for Singapore in 2018, which was derived from a Magic Formula strategy formulated by Joel Greenblatt.

With that in mind, I thought it might be useful to dig a little deeper into the company to find out things such as how it makes money, how it has grown its business, and its valuation.

How it makes money

HRnet derives its revenue by matching companies with employees for a fee. In 2017, around 77% of its S$391 million in revenue was derived from providing flexible staffing, which includes short-term positions and the gig economy. Professional recruitment contributed S$86.7 million or 22% of overall revenue. Another S$3.3 million was made out of providing services such as payroll processing.

Below is a pie chart showing its gross profit by segment:

Source: HRnetGroup 2017 Annual Report

Humble beginnings

As with most businesses, HRnetGroup started off as just a small company comprising a 4-man team and just 300 square feet of office space some 25 years ago. Since then, the company has blossomed into one with over 1,000 staff across 10 Asian cities.

Impressively, the company has made a profit in 24 out of its 25 years in operations. It survived both the difficult periods of the Asian Financial Crisis and the 2008 global financial crisis, growing from strength to strength and finally going public in 2017 as the largest recruitment firm in Asia outside of Japan. It now boasts a 20.5% market share in Singapore.

Between 2007 and 2017, the company’s net profit compounded by an impressive 12.6%.

Why it went public

Before its listing, HRnetGroup was already a hugely profitable business that generated strong positive cash flows. In fact, in its letter to shareholders, founding chairman, Peter Sim, and executive director, Adeline Sim, said that going public was a shock for many who knew the company.

However, going public made sense in a few ways for the company. Firstly, the management team wanted to extend the co-ownership scheme beyond its original group of 22 to bring on board 404 new co-owners. These were employees of the company who had performed well enough to deserve an ownership position in the company. Going public enabled the company to offer stock-based compensation and to align the interest of staff with shareholders.

Secondly, the company has done well to grow its business organically in the past. But going public would enable the company to make acquisitions to grow its business in emerging markets. Its first acquisition after becoming listed was a 51% stake in PT HRnet Rimbun to get a presence in the fast-growing Indonesia market.

The company’s management has said that they it will be looking to make more opportunistic acquisitions in the future. However, it is heartening to note that the management does realise the pitfalls of poor acquisitions and highlighted in its annual report that it will not be buying indiscriminately.

How it fared in 2017

HRnetGroup did very well in 2017. Revenue increased 7.4% to S$391.9 million. Notably, the group’s revenue growth accelerated during the year, from 6.5% year-on-year growth in the first quarter to 9.5% growth in the fourth quarter.

Likewise, adjusted net profit after tax, which excludes the initial public offering expenses and on-off government subsidies, grew 15.4% during the year to S$45.1 million.

Souce: HRnetGroup 2017 Annual Report

2017 was also the first year that the co-ownership scheme took effect. It is interesting to note that revenue and gross profit per sales employee increased by 10.5% and 5.4% respectively. This perhaps shows the effectiveness of aligning sales staff interest with shareholders.

Stock valuation

Finally and perhaps one of the most important factors to consider before any investment is whether the company’s stock trades at reasonable valuations.

At the time of writing, shares of HRnetGroup exchanged hands at S$0.885 per share. This translates to a price-to-book ratio of 2.6, a price-to-earnings ratio of 16.3 and a dividend yield of 2.7%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.