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HRnetGroup Ltd’s 2019 Second-Quarter Earnings: Business Hit by Macroeconomic Headwinds

On Tuesday, recruitment agency HRnetGroup Ltd (SGX: CHZ) released its financial results for the second quarter ended 30 June 2019. Let’s find out how the company performed in its latest quarter.

Show me the money

Revenue for the 2019 second quarter inched up by 0.5% to S$108.5 million, but gross profit decreased by 4.3% to S$38.1 million.

The fall in gross profit was largely due to lower gross profit from Singapore, which fell 10%, or S$2.2 million. Singapore contributed to the bulk of gross profit at 52%, down from 55% in the 2018 second quarter. Our country’s slowing gross domestic product (GDP) growth has affected HRnetGroup’s business; 2019 second-quarter GDP slowed from 3.8% a year ago to 0.1%, the lowest in a decade.

Gross profit margin came in at 35.1%, down from 36.9% a year back. The lower gross profit margin was mainly due to the addition of government contracts, which carry lower margins.

Meanwhile, net profit attributable to shareholders tumbled 11.5% to S$11.5 million. In the 2018 second quarter, the company booked in government subsidies of S$494,000 and unrealised gains of S$757,000 million from the revaluation of quoted and unquoted shares. This quarter, there wasn’t any government subsidy, and HRnetGroup also saw an unrealised loss of S$489,000 from the revaluation of quoted and unquoted shares. Adjusting for them, net profit in the 2019 second quarter would have increased by 2.1% year on year to S$12.0 million.

HRnetGroup’s balance sheet remains strong. As of 30 June 2019, it had cash and cash equivalents of S$274.4 million with no bank borrowings. In comparison, exactly a year ago, it had S$271 million in cash with no debt.

The group’s balance sheet contains S$30 million in current other financial assets and that relates to HRnetGroup’s strategic investments in marketable securities of HR-related companies, including TechnoPro Holdings in Japan, Bamboos Health Care Holdings Ltd in Hong Kong, and Gattaca plc in London, where HRnetGroup “opportunistically entered new markets in the human resources space.”

Moving on, operating cash flow for the reporting quarter decreased by 14.9% to S$10.1 million. After accounting for capital expenditure, free cash flow tumbled 13.2% to S$9.8 million. 

Investing for growth

In line with its plans to diversify its business, at the end of July, HRnetGroup acquired a 25% stake in the largest recruiter and workforce provider in the UK, Staffline Group plc. Staffline is now an associate company of HRnetGroup. Even though there are uncertainties in the UK due to Brexit, HRnetGroup feels Brexit also “presents good value for us to enter.”

Other than its investments in HR-related listed shares, HRnetGroup is also expanding its brand in the region. So far this year, the company has rolled out its RecruitFirst brand across Asia — RecruitFirst Kuala Lumpur opened its doors on 1 January 2019, RecruitFirst Shanghai on 1 April 2019, and RecruitFirst Taipei on 1 July 2019. 

What does the future hold? 

Adeline Sim, executive director of HRnetGroup, commented on the prospects of the company amid the macroeconomic headwinds:

“The continuing uncertainty over the trade disputes has led to muted hiring particularly in Singapore. We are pushing ahead with the flexible staffing business which performs the role of a natural hedge in times of volatility. We will also continue to capitalize on growth opportunities across product offerings and geography. Internally, we relentlessly pursue improvements in our technologies and operational frameworks in order to delight our customers, clients and employees, locking in loyalty even in down cycles.”

HRnetGroup also added that as China reported its lowest 2019 second-quarter GDP growth in 27 years, it expects “clients in China being a lot more cautious in making hiring decisions.”

Patience remains key 

HRnetGroup certainly saw some impact from the uncertainties in the world markets. However, the recruitment agency is also seeing pockets of opportunities to buy strategic stakes in listed companies all over to position itself better when the world economies recover. HRnetGroup’s strong balance sheet also cushions it from the tough economic conditions. Meanwhile, investors have to be patient with the company and not bail out just due to short-term headwinds.

At HRnetGroup’s share price of S$0.66 at the time of writing, it has a trailing price-to-earnings ratio of 13 (based on reported earnings) and a dividend yield of 4.2%.

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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.