HRnetGroup Ltd (SGX: CHZ) is the largest recruitment firm in Asia outside of Japan. Last week, the group announced that it had bought back close to S$100,000 worth of shares. Could this be an indication that management believes its shares are cheap?
A challenging period
HRnetGroup has suffered from a harsh operating environment in the last two quarters. Muted hiring due to companies holding off on their expansion plans, along with unrealised investment losses, has put pressure on its bottom line. This resulted in net profit attributable to shareholders falling 11.5% in the last reporting quarter.
Unsurprisingly, market participants have turned cautious on the stock, selling down HRnetGroup’s shares to around S$0.57, some 40% below their peak.
However, concerns about the company’s prospects seem to be overblown. The company is still highly profitable, generating S$30.8 million in profit and S$27.8 million in free cash flow over the first half of 2019.
Its balance sheet also remains rock solid with S$271 million in cash.
So, is it cheap now?
When companies make share buybacks, it may be a signal that its management believes shares are cheap.
At their current price of S$0.57, HRnet shares sport an annualised price-to-earnings ratio of just 9.3. That is lower than the historical average of around 17.
Given HRnetGroup’s earnings per share will likely increase when companies start expanding and hiring, its P/E ratio of 9.3 also looks low.
Moreover, if we throw the company’s net cash into the equation, its valuation looks even more compelling. Its EV-to-EBITDA (earnings before interest, tax, depreciation, and amortisation) multiple stands at a measly 3.48 (enterprise value (EV) = market capitalisation minus net cash).
For a company that’s free-cash-flow positive, has visible growth drivers, and is led by a management team not afraid to put its unused capital to use, an EV-to-EBITDA ratio of 3.48 looks absurdly cheap.
The Foolish bottom line
Based on its earnings capacity and net cash balance, HRnetGroup shares indeed look cheap. The company’s decision to use some of its cash to make share buybacks is also an indicator that management thinks likewise. Investors who are looking for a bargain may want to take a closer look at this recruitment firm, which could prove to be a big winner in the future.
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 Jeremy Chia owns shares in HRnetGroup Ltd.