HRnetGroup sanguine on Staffline play, profitability amid macro headwinds

WITH its large exposure to the labour market in Singapore and North Asia, recruitment specialist HRnetGroup is in the eye of the Covid-19 storm. But its executive director Adeline Sim plans to tide it over by tapping demand for flexible staffing, while hunting for M&A opportunities that diversify the company's revenue streams.

The key weapon is HRnetGroup's S$266.2 million cash kitty, over half of its market cap. While some market watchers have had misgivings over HRnetGroup's entry into troubled UK firm Staffline last year, Ms Sim remains confident of the company's M&A strategy.

In a recent interview at HRnetGroup's office in Ngee Ann City, Ms Sim acknowledged the mixed market sentiment surrounding its purchase of a 29.95 per cent stake in Staffline for S$55 million.

The UK-based recruitment agency is listed on AIM, the junior market of the London Stock Exchange. HRnetGroup's stake is just shy of the 30 per cent threshold triggering a general offer. Although it is now the single-largest shareholder, HRnetGroup does not have a board seat at Staffline.

"We initially were going to take a board seat, and they announced that we were going to. But after, there were some discussions about how they wanted to restrict our voting rights. We couldn't agree with that. When I went up to London in November, we had negotiations with the lawyers but we couldn't come to an agreement," Ms Sim said.

In January last year, prior to HRnetGroup's investment, Staffline's auditors had received an anonymous email with allegations over the company's payroll and invoicing practices, as well as related tax liabilities.

After an investigation, Staffline recorded exceptional costs of £15.1 million (S$26.2 million) over past non-compliance with the National Minimum Wage regulations. For the six months ended June 2019, Staffline reported an 11 per cent rise in revenue to £534.6 million but a loss per share of 22.4 pence. Its auditor PwC resigned in August 2019.

Shares of Staffline shed over 80 per cent of their value between May and June 2019, and HRnetGroup began accumulating its position in July. In its largest purchase on July 31, HRnetGroup paid 180 pence per share for 11.7 million Staffline shares, representing a 51.3 per cent premium to Staffline's closing price the day before.

When asked why HRnetGroup is bullish on Staffline despite its checkered past, Ms Sim said: "They are deploying 60,000 people out per day; that kind of scale takes time to build ... To have the contractor base and systems to support this can't be built overnight.

"When we made the investment, we were aware that on a financial level, the company was not looking its best. But that was also due to historical events ... On an operational level, does Staffline have something valuable? The answer is yes."

Analysts had initially been positive about the acquisition, with RHB suggesting it could be "extremely yield-accretive" and help HRnetGroup break into Europe. But excitement dampened after HRnetGroup reclassified its holding in Staffline from an associate to a financial asset at FVTOCI (fair value through other comprehensive income). The main reason cited for this was that HRnetGroup has neither "a board seat nor significant influence over the business".

CGS-CIMB analyst Ngoh Yi Sin recently downgraded her call on HRnetGroup to a "hold", citing "poor M&A execution" as a secondary factor. She nevertheless noted that the reclassification could be a "blessing in disguise" that spares HRnetGroup any hits to net profit if Staffline makes further provisions.

A recent change of management suggests HRnetGroup may yet get its board seat. Staffline's chief executive, Chris Pullen, tendered his resignation late last month.

"At this point, I don't think we are in a terrible hurry ... We're just (saying), let's just sort it out first and have your new CEO in place, before we decide how we want to take this further," said Ms Sim. "Staffline was never meant to be a "day trade", and we knew that it would take some time to turn around."

Meanwhile, HRnetGroup has continued to expand. In January, it took a 49 per cent stake in a new joint venture in Indonesia with two of its existing Indonesian business partners. Ms Sim said she is continuing to look for more such opportunities in "gaps within Asia", such as Vietnam, and has even looked as far away as Brazil.

"We are not interested in looking at companies where people want to sell out. It's more about co-owning, investing together and building it into something much bigger," Ms Sim said.

For FY2019 ended December, 50.8 per cent of HRnetGroup's gross profit came from Singapore and 45.7 per cent from North Asian markets, including China, Japan and South Korea.

Ms Sim acknowledges that the virus outbreak will impact the company's operations. "In Singapore, we don't service hospitality as heavily, but I can tell you that the retail sector has definitely been impacted, because we service quite a lot of them," she said. "The requirement for temporary staff has come down, because they can make do with their permanent staff. The sheer fact is that sales have been impacted; our retail team straightaway felt it."

Hong Kong, meanwhile, has been hit by the double whammy of Covid-19 and political uncertainties, leading companies there to lay off staff.

In Japan and mainland China, however, Ms Sim reports that sentiment on the ground is still optimistic. "Actually, the Chinese business units are less pessimistic. The Shanghai unit, for instance, sees things picking back up," she said.

Ms Sim is therefore confident that HRnetGroup can maintain its profitability this year. She expects demand for flexible staffing from both healthcare and e-commerce players to grow, alongside ad hoc demand to deal with the outbreak.

HRnetGroup saw a surge in demand when Singapore raised its alert level to orange in early February.

"We had an order for more than 400 temperature screeners, so we were really running. This is not the first time, it was the same during Sars," she said. "Every time there's a seismic shift, there are clients who will find that they don't have people to do certain things; we just jump in ... We have a couple of e-commerce clients. They naturally needed drivers and the logistics people. It was through the roof."

Gross margins for flexible staffing tend to be lower. The segment reported a margin of 14.9 per cent last year, versus 99.7 per cent for professional recruitment. "But we'll create value wherever we can," Ms Sim said.

Such value creation could include income from opportunistic investments. Last year, HRnetGroup recorded a S$6.1 million investment gain partly from holdings in Japanese HR-related stocks. "Our Japanese business was doing well because everyone was gearing up for the Olympics," she explained. "So that's when we thought that this is a good time to be invested in Japanese HR stocks; those that we know personally, and we know that they are well-run and clearly have growth plans in mind.

"In a year where operations are tough, anything helps ... The way we see it is this, if we are immersed in the energies of the market, then we'll just find some angle with which to benefit from it and capitalise on what we know."

Last year, HRnetGroup posted a 1.3 per cent decline in revenue to S$423.1 million. Its net profit, however, increased 7.1 per cent to S$51.6 million thanks to its investment gains as well as higher interest income.

The stock closed on March 13 at 47 cents or nine times earnings. Excluding its cash hoard, however, it trades at just four times earnings.