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2 Clear Signs That HRNetGroup Ltd is Under Stress

HRNetGroup Ltd (SGX: CHZ) is a talent acquisition and flexible staffing firm in Asia with operations in 13 cities. The group has two complementary segments, professional recruitment and flexible staffing, serving clients from 30 diversified sectors such as financial institutions, retail and consumer and manufacturing.

The group was listed in June 2017 and has reported strong growth, while making use of its initial public offering (IPO) proceeds to acquire companies in the UK and Hong Kong as part of its expansionary strategy. However, with the slowdown in many economies in Asia and other parts of the world, signs of stress are beginning to show for HRNetGroup.

Here are two clear signs that investors should take note of for HRNetGroup as they may indicate further declines in the group’s performance in time to come.

1. Declines in gross and net profit

Though HRNetGroup reported a marginal increase in year-on-year revenue to S$108.5 million in its Q2 2019 earnings, gross profit declined by 4.3% year-on-year as subcontractor expenses increased more than revenue. With higher selling and other expenses, this also dragged down net profit after tax, which saw an 11.5% year-on-year decline to S$11.5 million.

On a half-year basis (H1 2019), revenue was down 1.2% year-on-year. Though reported net profit was up 5.2% year-on-year, investors should note that the numbers included two one-off gains – fair value gain on marked to market financial assets and gain on disposal of financial assets. After adjusting for these two numbers in both financial years, net profit was actually down 9.4% year-on-year.

These declines show that rising costs and slower revenue growth may continue to weigh on HRNetGroup’s results, and it remains to be seen if the group can overcome this.

2. A drop in placements

HRNetGroup saw a fall in its professional recruitment business with 4.2% fewer placements, falling from 4,441 to 4,256 in H1 2019. Recall that this division makes up around 24% of total revenue for FY 2018, but took up the bulk (67%) of gross profits. This implies that the division represents the high margin, low volume segment of HRNetGroup’s business. A fall in placements will have adverse financial effects on the group as the division is the driver of gross (and net) profits for the business.

Adeline Sim, executive director of the group, explained that the fall in placements was due to muted hiring demand as a result of the economic uncertainties created by the US-China trade dispute. This seems to be an industry-wide phenomenon, and as long as there is no resolution in trade talks, sentiments are unlikely to rebound in the near-term.

Acquisitions may provide a buffer

There are mitigating factors for the business though, as flexible staffing business still saw marginal growth (rather than a decline), and the group is pushing ahead with acquisitions to bolster its product offerings and geographic reach. As I had written previously, these acquisitions will take time to integrate into the group and may only start contributing at a later stage. Investors, therefore, need to adopt a patient attitude when reviewing the group’s financials. The upside is that HRNetGroup continues to generate very healthy and consistent free cash flows even though it is facing challenges.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of HRNetGroup Ltd. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.