• Maintain BUY, new SGD0.84 TP from SGD0.91, 15% upside, c.5% FY24F yield. We continue to be positive on HRnetGroup based on expected economic recovery in Singapore and China. Our economist forecasts the former’s 2024 GDP growth to accelerate while maintaining strong GDP growth of 5% for the latter. We like the stock for its compelling valuation vis- à-vis growth as a beneficiary of economic recovery this year.

• FY23 earnings below. Revenue came in at SGD578m (-5% YoY) while core earnings rose 1% YoY to SGD56m – below our forecast. While headline earnings are in line, they were lifted by SGD9m in reversal of trade-related accruals. Revenue growth was dragged by a 32% YoY decline in the professional recruitment segment (SGD66m), supported by flattish revenue from flexible staffing (SGD509m). Gross margins fell to 24% (-4.5ppts) as the revenue mix of flexible staffing increased. FY23 saw a decline in both the number of professional recruitment placements (-19% YoY), and revenue and gross profit per placement. This was led by a slower hiring environment across its key markets. In the flexible staffing segment, the average number of contractors declined. This was offset by higher gross profit per contractor. Core EBIT margins underperformed our expectations by 1ppt at 12% on lower than expected gross margins. HRNET declared a final dividend of 2.13 SGD cents, bringing full-year dividends to 4 SGD cents, which is unchanged from last year. Dividend payout ratio amounted to c.60%. As overall EBIT margins have missed our expectations, we lower our FY25F-26F earnings by 6.5% each to factor in the current run-rate. Nonetheless, we expect core earnings growth of 5-8% going forward on a recovering employment outlook.

• Expecting better job outlook. Our economics desk estimates Singapore’s 2023 GDP growth at 1.5%, before accelerating to 2.5% in 2024 – driven by an improving external environment. More robust global demand should drive domestic industries’ recovery and, eventually, the demand for labour, which will lend support to our earnings outlook. For China, our economists see signs of continued economic recovery and has forecasted a 5% GDP growth for 2024. This should translate into higher job demand in 2024 as well.

• Maintain BUY. We continue to like HRNET for its: i) Cash-generative ability, ii) strong net cash balance sheet, iii) attractive dividend yield, iv) undemanding valuation at -0.5SD of its historical mean forward P/E, v) continued share buyback in support of EPS, and vi) as a beneficiary of the economic recovery going into FY24 – especially in Singapore and China. Our new SGD0.84 TP pegs the stock at +0.5SD of the historical mean forward P/E.

• Key risk. Slower-than-expected recovery in the key labour markets of Singapore, China, and Taiwan. As HRNET’s 3.0 ESG score is below the 3.1 country median, our TP includes a further 2% ESG discount to its fair value.

Source: RHB Research - 27 Feb 2024