Broker's take: Labour market rebound, flexible staffing can benefit HRnetGroup

CGS-CIMB has raised its target price on recruitment firm HRnetGroup on improving labour markets in Singapore and China, and potential revenue from flexible staffing arrangements to cushion the impact of Covid-19.

In a research note dated Tuesday, the brokerage reiterated its "add" rating, with the target price now 63.5 Singapore cents, up from 52.3 cents previously.

CGS-CIMB analysts Darren Ong and Lim Siew Khee noted that the latest economic data shows that China has returned to pre-Covid-19 levels, and is the strongest country for a recovery in hiring.

They added that HRnetGroup's management has indicated that the company is seeing increased levels of hiring from clients in manufacturing, retail and luxury industries.

"We expect China to be the largest driver of growth for North Asia, and expect higher volume of permanent placements as employers add headcount for expansion on the back of improving economic fundamentals," the analysts wrote.

They added that they expect better margins from the North Asia segment, as most of the volume comes from higher margin permanent placements. They expect North Asia to account for a higher contribution to gross profits in the coming financial years, given that China is set to be the only major economy to register economic growth for this financial year.

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The analysts also observed that there are signs of stabilisation in Singapore's labour markets, noting that resident employment levels rebounded to near pre-Covid-19 levels in Q3 2020, according to reports.

"We think that unemployment rates will likely bottom out by the end of this year, given that the pace of increasing resident unemployment rates have slowed," they wrote.

While the pandemic will continue to present uncertainties, the analysts believe that there will be bright spots from certain sectors such as technology manufacturing and healthcare.

Overall, the analysts expect employers to remain cautious in their hiring until they see improvements in their profits, and expect recruitment in Singapore for the next financial year to be mostly flexible staffing, which is a trend that can cushion the Covid-19 impact, CGS-CIMB said.

The analysts met with HRnetGroup's management, who said employers are adopting a leaner model by hiring contract employees to keep costs variable amid ongoing uncertainty from the pandemic.

"HRnet is a well-liked local name with a long-standing track record with various government agencies," the analysts wrote. They believe that HRnetGroup is able to secure more mandates from clients and expect the flexible staffing segment to drive recruitment volume for the next financial year.

CGS-CIMB have increased their assumptions for the number of contract hires for the 2020 and 2021 financial years.

They have reduced their assumptions on the number of permanent placements for the current financial year, but raised them for FY21 and FY22, as they expect more active hiring of full-time staff as earnings for corporates in Singapore and North Asia gradually improve.

It has lowered its FY20 earnings per share forecast by 8.9 per cent to factor in the lower margin flexible staffing business. However, the forecasted earnings per share for the next two financial years have been raised by 7.2 to 13.8 per cent. The new target price is pegged to 13.2 times forecasted earnings for 2022, and is one standard deviation below the three-year historical mean.

The brokerage added its analysis of past crises has shown that global recruitment companies shares have rebounded strongly post crises.

"We believe Asian listed recruitment companies are likely to outperform non-Asian listed peers given the ongoing Covid-19 uncertainty in both the US and the UK," the analysts wrote.

"In particular, we like HRnet for its large exposure to Singapore and China given that both countries have largely contained the spread of the virus and are on track for a gradual reopening of their economies."

The key downside risks observed by the analysts are deteriorating macroeconomic conditions.

HRnetGroup shares traded at 52.5 Singapore cents as at 1.11pm on Wednesday, up 1.5 cents or 2.9 per cent.