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HRnetGroup Ltd: An Exciting Growth Stock with Attractive Valuation

Founded in 1992, HRnetGroup Ltd  (SGX: CHZ) has grown to become the largest recruitment and staffing firm in Asia (excluding Japan). The firm was listed only last year, after 25 years as a private company. Over the last decade (2007 to 2017), HRnet’s net profit has grown at an impressive compounded growth rate of 12.6% per annum. Here’s why I think that despite its already large size, the company still has many years of growth ahead.

Recent acceleration of revenue growth

HRnet’s revenue has experienced growth in the most recent two years. The top line grew by 2.5% and 7.4% in 2016 and 2017 respectively. However, what is worth noting is that the revenue growth has accelerated in recent quarters.

In the first half of 2017, revenue growth stood at 6.5% and 6.4% for the first and second quarter respectively. In the second half of the year, revenue growth accelerated to 7.0% and 9.5% in the third and fourth quarters respectively. For the first quarter of 2018, which ended on 31 March, the firm reported an even more impressive 12.2% increase in revenue.

The acceleration in its top-line growth suggests that the firm still has a runway for growth in the years ahead.

Net profit margin widening

Likewise, HRnet’s net profit has improved in recent years, in part due to better cost efficiencies. This has lead to net profit increasing at a faster rate than revenue. In 2016 and 2017, normalised net profit (excludes one-off IPO expenses and government subsidies) rose by 6.3% and 15.4% respectively. In the first quarter of 2018, profit after tax jumped 34.1% year-on-year.

There are a few reasons for this improved cost efficiencies. For one, since its initial public offering, the company has made use of share-incentive program to reward high-performing sales staff. This has increased the staff efficiency as staff have now become co-owners of the company, aligning their interest with shareholders. Sales employees are also working hard to strive to get into the “co-ownership” program. The chart below illustrates the improved productivity of sales employees:

Source: HRnet’s 2018 Q1 Earnings Presentation

As you can see, both revenue and gross profit per sales employee grew at a healthy double-digit pace in the first quarter of 2018.

Inorganic growth prospects

One of the key reasons why the company wanted to go public was to raise additional funds to make strategic acquisitions to grow its business. It has already announced its first post-IPO acquisition of a 51% stake in PT HRnet Rimbun in Jakarta. This will provide the company with exposure to the fast-growing Indonesian market, which has a population of 266 million people. The new acquisition will make a full-year contribution to HRnet’s business this year. In February, HRnet also announced that it had invested US$378,000 in Glints, a technology startup focusing on young professionals and graduates.

That said, it is also heartening to see that HRnet’s management team is aware of the pitfalls of making poor acquisitions. Peter Lynch used the term “diworsification” to describe companies that bought other companies in a bid to broaden their businesses, but which in reality worsened the company’s position.

Peter Sim, founding chairman of the group, said in his letter to shareholders recently:

“You can be certain we will definitely be working on more strategic acquisitions, but we must highlight that our acquisitions are opportunistic. We will not be indiscriminately buying. We look for companies who have a team passionate about growing, not on “earning out” within a short time frame, whose primary, full-time commitment is to their company.”

The Foolish bottom line

Through prudent management and regional growth, HRnet has become the biggest recruitment agency in Asia outside of Japan. However, despite its previous successes, the company is not resting on its laurels. It has taken the opportunity to go public last year to increase its cash reserves and to initiate a co-ownership program with its staff. This has already worked wonders in aligning shareholders’ interest with employees. With its recent entry in Indonesia, greater financial muscle and potential for organic growth, the company looks poised to continue its growth for many years to come.

Moreover, at the time of writing, shares of HRnet exchanged hands at S$0.85 per piece. This translates to an annualised price-to-earnings of just 13.2, which in my view is a low multiple to pay for a company with strong growth prospects, a clean balance sheet and a capable management team.

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