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HRnetGroup Ltd’s Share Price Is Down 20% Since Its IPO: Is All Hope Lost?

HRnetGroup Ltd (SGX: CHZ) is the largest recruitment firm in the Asia-Pacific region (excluding Japan). The company went public just over two years ago, on 16 June 2017, at a share price of S$0.90. Since then, its shares have not performed well. At the current share price of S$0.685, HRnetGroup is selling at 23.9% below its initial public offering (IPO) price. Is it time to dump HRnetGroup’s shares and never look back? I think not, as the company could just be facing some short-term struggles.

Business headwinds

HRnetGroup did not have a perfect start to 2019, and that could have worsened its share price performance.

In its most recent first quarter, HRnetGroup’s revenue fell 2.8% year on year to S$104.0 million from S$107.0 million due to the softening global economy. Due mainly to one-off gains, net profit improved 18.5% to S$19.3 million, a new high for the company. If not for one-time gains, net profit would have fallen by 11.5% to S$9.3 million.

HRnetGroup gave the following warning in its earnings update:

“As a leading recruitment company in Asia ex-Japan, our performance is in some ways, a barometer of the economies that we operate in. First quarter GDP statistics of the economies that we operate in did not offer strong signals of the economic headwinds abating.

Singapore, which contributed 51.5% to our gross profits, registered GDP growth of 1.3% in Q1 2019 compared to 4.7% in Q1 2018. If the strong headwinds continue for the rest of the year, it will likely to have an impact on our business.”

The cautionary note seems scary. However, in my opinion, the company is only facing short-term headwinds; the long-term picture still looks pretty.

Long-term picture

According to Frost and Sullivan, Singapore’s market for professional recruitment and flexible staffing was S$1.4 billion in 2016 and is expected to grow at an annualised growth rate of 4% between 2016 and 2021. Beyond Singapore, Asia has plenty of opportunities, too, and HRnetGroup is looking to capture that growth.

In January 2019, RecruitFirst Malaysia commenced operations, followed by RecruitFirst Shanghai in April this year. RecruitFirst Taipei is expected to launch its services in July 2019. With an expanded footprint, HRnetGroup can service its regional clients more efficiently across their various regional offices. This creates a robust network across the region for HRnetGroup, making customers stickier.

HRnetGroup has the financial muscle to see through its business expansion and also survive the soft economic conditions.

Strong cash-generating ability

Two big things investors should look for in any potential investment are a strong balance sheet and the company’s ability to produce copious amounts of free cash flow. In that respect, HRnetGroup has ticked the right boxes.

As of 31 March 2019, the recruitment agency had cash and cash equivalents of S$304.5 million with no bank borrowings. Free cash flow grew 41.2% year on year to S$18 million in the first quarter of 2019. The growth came on the back of operating cash flow surging 39.8% to S$18.1 million. That strong cash-generating ability, coupled with a falling share price, makes the business attractive for long-term investors.

Valuation

At HRnetGroup’s share price of S$0.685, it is valued at a price-to-earnings ratio of around 14 and has a tasty dividend yield of 4.1%. For an asset-light company with strong growth potential, the company looks cheap. If you’re a long-term investor, it would certainly be worth taking a second look at HRnetGroup.

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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.