• Excluding one-offs, HRnetGroup’s FY18 core PATMI would have grown 22.2% y-o-y to S$53.7m, meeting our/Bloomberg consensus forecasts at 99%/98%.
• We expect the newly consolidated businesses (REForce, Rimbun, Career Personnel) to ramp up in FY19F, but turn cautious on the macro outlook.
• Maintain ADD; stock offers 3-4% FY19-21F yield with M&As as potential re-rating catalyst.

4Q18 Core PATMI Stable; FY18’s Surge 22.2% Y-o-y

• HRNETGROUP LIMITED (SGX:CHZ)’s FY18 reported PATMI of S$48.2m appeared a miss our and consensus expectations, largely due to one-off items including an S$1.6m debt provision and S$3.9m fair value (FV) loss on financial assets. Excluding these, FY18 core PATMI would have been S$53.7m (+22.2% y-o-y), at 99%/98% of our/Bloomberg consensus forecasts.
• The double-digit bottomline improvement was driven by 9.3% y-o-y topline growth and better gross margin (4Q18: 36.1%, 4Q17: 34.3%) as a result of greater contribution from professional recruitment, which offset the higher employee expenses (+14.1% y-o-y).

Explaining the One-offs

• The 42.3% spike in FY18 selling expenses came on the back of an S$1.6m debt provision in 4Q18 for two start-up companies; management has since tightened its credit policies.
• The bulk of its unquoted financial instruments have been disposed of, while the share prices of its marketable securities have recovered. Hence, we deem the likelihood of such recurrence (S$3.9m Fair Value loss) low in the near term.

China, Professional Recruitment Were Key Growth Drivers

• Professional recruitment and China were its key earnings contributors in FY18, adding S$16.4m and S$9.2m to gross profit (GP) respectively.
• The number of sales employees rose from 809 to 941 during the year, and productive headcount inched up to 73.8% (FY17: 71.4%). GP per sales employee dipped 1.5% y-o-y due to the consolidation of REForce, Rimbun and Career Personnel (+6.7% y-o-y if M&As are excluded), which contributed S$4.4m sales and S$2.9m GP in FY18.
• HRnetGroup aims for three openings in FY19F – in Malaysia, Shenzhen and Shanghai, and sees Vietnam as the next potential market.

Maintain ADD, With Lower FY19-20F EPS

• As we turn more cautious on the macro environment and hiring pace in HRnetGroup's core markets, we lower our revenue assumptions and cut our FY19-20F EPS by 6.7-7.0%.
• Our target price falls to S$1.03, still pegged to 18x CY20F P/E. FY18 DPS of 2.8Scts was declared, based on 50% payout ratio (core earnings), translating to 3.6% dividend yield.
• We maintain our ADD rating.
• Downside risks: global economic slowdown and poor overseas execution.
• Key potential re-rating catalysts: earnings-accretive M&As, backed by its excess cash of S$120m (as at end-FY18); we have yet to factor in this into our forecasts.

Source: CGS-CIMB Research - 22 Feb 2019