The Motley Fool

Does HRNetGroup Limited Have a Strong Business Model?

HRNetGroup Limited (SGX: CHZ) is a talent acquisition and flexible staffing company with operations in 13 cities across Asia. The group has two main business divisions — professional recruitment and flexible staffing — and serves clients from over 30 diversified sectors, including retail, manufacturing, and financial institutions.

HRNetGroup has been expanding rapidly into many cities in Southeast and North Asia and has several established brands such as HRNetOne, PeopleSearch, and Recruit Express under its belt. However, for H1 2019, the group encountered a slowdown in business activity (due to the US-China trade war) that led to a 4.2% year-on-year decline in professional placements to 4,256. The group is relying more on its flexible staffing business to tide over this period, but the main profit generator is the professional recruitment segment.

Investors have also been similarly downbeat, as the share price of HRNetGroup has plunged around 24% year to date from S$0.79 to S$0.60. The group is now trading at a price-to-earnings ratio of around 12 times and offers a historical dividend yield of 4.6%. Does HRNetGroup have a strong enough business model to see it through this slowdown?

Historical financials

Business development efforts seem to have paid off, as the group has been steadily increasing its top line from S$324.4 million to S$428.5 million. Gross profit margin has also stayed resilient over the years, at around 36%, while net profit margin has hovered between 10% and 11%.

These are admirable numbers for a company that exists in a very fragmented industry with low barriers to entry, and they can be credited to management’s savvy in building up a strong reputation and track record as the “go-to” vendor for professional placements and staffing. With the current slowdown, revenue has dipped slightly for H1 2019 by 1.2% year on year, but I believe the group has a strong market position and is also fairly entrenched in the markets it serves, which will allow it to ride the recovery when it comes along.

Free cash flow

HRNetGroup has generated very steady and consistent free cash flow (FCF) over the last five years. Its strong cash-generation capability stands it in good stead should it encounter a downturn, as its capital expenditure requirements are low (as it is a staffing business), and it relies mainly on its human capital for its business.

For H1 2019, FCF even improved to S$27.6 million from S$24 million a year ago despite the weaker bottom-line performance. Investors should rest assured that the group will be resilient even during a slowdown.

A strong business model, but sensitive to macro conditions

Given the above, HRNetGroup indeed seems to possess a strong business model along with strong FCF generation capability. This will tide it over through a downturn relatively unscathed, but investors should note that its business is tied to the health of the underlying economies in which it has a presence. So, there may be more short-term pain as these economies enter a slower phase of growth, but those who can keep the faith should eventually see better days 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 Limited. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.