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HRnetGroup Ltd’s Latest Earnings Reflect Soft Market Conditions

HRnetGroup Ltd (SGX: CHZ) is the largest Asia-based recruitment agency in the Asia-Pacific, excluding Japan, region. On Friday morning, HRnetGroup announced its financial results for the first quarter of 2019, which ended on 31 March. Let’s look at some of the key points from the earnings announcement.

1) Revenue for the reporting quarter fell 2.8% year-on-year to S$104.0 million from S$107.0 million. The fall was mostly due to cautious hiring from HRnetGroup’s clients, especially in Singapore.

2) Gross profit decreased by 2.8% to S$35.4 million.

3) The gross profit margin was stable at 34.1% as the higher margin professional recruitment business contributed more to gross profit this quarter.

4) Other income rose 70.5% to S$11.3 million largely due to a gain of S$1.1 million on disposal of strategic investments, and an unrealised gain of S$4.4 million from the revaluation of quoted and unquoted shares. HRnetGroup also received S$4.5 million in government grants for the quarter, down from S$5.0 million a year ago. The company will receive grants until 2021, in varying amounts. Stripping out these items, adjusted other income would have only grown by 56% to S$1.2 million.

5) Operating expenses increased by 1% to S$23.1 million.

6) As a result, net profit attributable to shareholders improved 18.5% to S$19.3 million, a new high for HRnetGroup. If adjusted for the items mentioned above in other income, net profit would have fallen by around 12% to about S$9.0 million.

7) HRnetGroup’s balance sheet remains rock-solid. As of 31 March 2019, it had cash and cash equivalents of S$304.5 million with no bank borrowings. In comparison, at the end of last year, it had S$281.8 million in cash with no debt. In the latest quarter, the company booked S$13.3 million in lease liabilities due to the adoption of an accounting standard effective from 1 January 2019.

8) Operating cash flow for the reporting quarter grew a commendable 39.8% to S$18.1 million. HRnetGroup had negligible capital expenditures in both years, resulting in free cash flow increasing by 41.2% to S$18.0 million in the 2019 first-quarter.

9) The recruitment group expanded further in Asia recently. In January 2019, RecruitFirst Malaysia commenced operations, followed by RecruitFirst Shanghai in April 2019. RecruitFirst Taipei will be launching its services in July this year. These should help to slowly diversify HRnetGroup’s revenue away from Singapore, which brings in the bulk of sales now.

10) In the earnings release, HRnetGroup’s executive director Adeline Sim cautioned about headwinds to its business:

“2019 was off to a relatively slower start with lingering uncertainties surrounding trade negotiations and regional political tensions, negatively affecting sentiments. Our results reflected that softer side of the market, as companies were cautious with regards to business expansion and hiring.

As the leading recruitment company in Asia ex-Japan, our performance is in some ways dependent on the underlying economies we operate in. If the headwinds persist into the year, it will likely have an impact on our business, particularly for our biggest and most open market, Singapore.”

There are obviously uncertainties in the global economy due to the ongoing trade tensions between the US and China, among other things. These have led to HRnetGroup’s clients proactively managing their budgets, which may be a short-term issue for the company.

Over the long-term, however, with offices in many parts of this region, HRnetGroup should be able to tap into the growth from the rising middle class in this part of the world. Its strong balance sheet is also likely to see it through any harsh economic conditions. HRnetGroup’s share price closed at S$0.77 last Thursday. At that price, the company had a trailing price-to-earnings ratio of 15 (based on reported earnings) and a dividend yield of 3.6%.

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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 HRnetGroup Ltd. Motley Fool Singapore contributor Sudhan P owns shares in HRnetGroup Ltd.