1 Singapore Stock to Look Into for July 2021 and Beyond

Since hitting a bottom of S$0.41 per share in April 2020, this company’s share price has gone on to increase 68% to S$0.69 at the time of writing.

With the economy growing once again after being hit by the pandemic and vaccination rates increasing, this company’s business has the potential to pick up further.

And so can its share price over the longer run.

The company I’m referring to is HRnetGroup Ltd (SGX: CHZ), the largest recruitment firm in the Asia-Pacific region (excluding Japan).

And it could be a stock that you might want to consider buying for July 2021 and beyond.

TL;DR: HRnetGroup — A Stock To Consider for July 2021

Here’s why HRnetGroup is worth a second look:

• HRnetGroup is a large recruitment firm in Asia-Pacific with operations in 13 Asian cities, including Singapore.
• The company’s business was hit last year due to the pandemic.
• However, HRnetGroup has a strong balance sheet and the ability to produce copious amounts of free cash flow, allowing it to take on any economic challenges with confidence.
• With the broader economic recovery prompting hiring managers to start recruiting again, HRnetGroup could be one strong beneficiary.

Understanding HRnetGroup’s Business

If you took up any temporary jobs during your school holidays, you would have probably used HRnetGroup’s services.

HRnetGroup is the owner of Recruit Express, a well-known recruitment firm in Singapore, and many other brands such as Recruit First, PeopleSearch, and HRnetOne.

Currently, HRnetGroup has operations in 13 Asian cities, including our city-state.

HRnetGroup operates two main business segments – professional recruitment and flexible staffing. The following table shows the breakdown of HRnetGroup’s 2020 revenue:

Revenue from flexible staffing comprises fees charged to HRnetGroup’s clients to cover the relevant contractor employees’ payroll in full and a portion of their payroll costs.

The key brands under this business are Recruit Express and RecruitFirst.

Revenue from professional recruitment consists of fees charged to clients as a percentage of the candidate’s remuneration in the first year of employment.

HRnetOne, PeopleSearch, and SearchAsia are the main brands under this business.

Last but not least, revenue from others comprises income from providing services such as payroll processing, recruitment process outsourcing, and business process outsourcing.

The following shows the breakdown of HRnetGroup’s 2020 revenue in terms of sectors:

From the above, it can be seen that HRnetGroup’s revenue is diversified across many sectors.

The government and healthcare sectors brought in most of 2020 revenue, understandably so due to the pandemic where flexible staffing was in demand.

There’s also no concentration risk in HRnetGroup’s business as no single customer accounted for more than 10% of 2020 revenue.

Sound Business Fundamentals

Here’s a summary of HRnetGroup’s financial performance from 2017 to 2020:

For 2020, HRnetGroup’s revenue increased by 2.4% year-on-year to a record of S$433.0 million, despite the COVID-19 pandemic.

The better showing was largely due to higher revenue from its flexible staffing segment, which grew 10.3% to S$357.6 million. This was partially offset by lower revenue from the professional recruitment segment, which fell 24.3% to S$72.6 million.

HRnetGroup’s flexible staffing segment helped 42,998 people secure employment in contract and temporary roles, an increase of 6.4% year-on-year.

Revenue from the healthcare sector improved by 28.0%, while the government sector grew by 68.2%.

HRnetGroup’s flexible staffing segment carries a much lower gross profit margin than its professional recruitment segment. Therefore, the gross profit margin for 2020 came in at 29.9%, down from 34.4% a year ago.

However, HRnetGroup’s diversified business helped it to cushion itself against volatility in business volume at different points of economic cycles.

The company’s net profit tumbled 9.2%, from S$51.6 million in 2019 to S$46.9 million in 2020.

In its 2020 annual report, HRnetGroup explained the reason for the lower net profit, despite posting record revenue:

“Companies shied away from taking on new heartcount when they were unsure what market demand would look like under lockdown. Even after the market for talent acquisition regained some semblance of normalcy, it took time for hiring managers to adapt to bringing new hires onboard virtually. As such, despite the fact that the Group is reporting a record year in terms of revenue, there is a hit to our bottom line as there was a distinct swing of business mix in favour of flexible staffing which reports thinner margins.”

With the lower net profit, HRnetGroup’s dividend per share also fell from 2.8 Singapore cents to 2.5 Singapore cents. The company’s dividend practice is to pay out at least 50% of its net profit as dividends.

Cash-Generating Ability Intact

Other aspects investors should look out for in any company is a strong balance sheet and its ability to produce copious amounts of free cash flow.

In that respect, HRnetGroup ticks the right boxes.

As of 31 December 2020, the recruitment agency had cash and cash equivalents of S$332.2 million with no bank borrowings.

Free cash flow grew from S$58 million in 2019 to over S$100 million in 2020. The growth came on the back of operating cash flow improving by 76% to S$104.5 million.

HRnetGroup’s strong cash generating-ability, coupled with its healthy balance sheet, allows it to survive any tough economic conditions that may come.

Future Looks Bright

A shareholder posted a question for HRnetGroup’s 2020 annual general meeting on whether professional recruitment has improved since COVID-19.

In response to that question, the company said that it has recently seen some signs of improvement in professional recruitment activities.

And the improvement should continue going forward, provided the pandemic situation doesn’t regress.

Singapore’s Ministry of Trade and Industry forecasts our economy to grow between 4% and 6% for 2021.

In fact, the Monetary Authority of Singapore’s managing director Ravi Menon said yesterday that our economic growth could exceed the official forecast range this year.

This is due to the strengthening global demand and progress in Singapore’s vaccination programme.

With such a rosy outlook, HRnetGroup could see higher usage of its services, leading to better financial performance for the company.

A Look HRnetGroup’s Valuation

At HRnetGroup’s share price of S$0.69, it is going at a price-to-earnings (P/E) ratio of around 15x and a dividend yield of 3.6%.

In comparison, the SPDR STI ETF (SGX: ES3), which can be taken as a proxy to the Singapore stock market, has a P/E ratio of around 18x.

For an asset-light company with decent growth potential, the company’s valuation doesn’t look demanding to me.

Having said that, one big risk with HRnetGroup is how intricately its business is tied with a country’s economy.

Companies tend to cut costs when the economy performs poorly, including reducing headcount and freezing new hires. In turn, HRnetGroup’s business could get hit.

That’s precisely what happened last year. So, this risk is something investors should take note of.

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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer owns shares in HRnetGroup.