• Maintain BUY and DCF-backed Target Price SGD0.94, 42% upside plus 4% yield.
• Singapore weakness remained, as gross profit contribution was -10% y-o-y due to a slowdown in hiring after the unicorn hiring spree ended.
• With a tough marcoeconomic outlook, we expect hiring from Singapore to remain weak. However, HRnetGroup's high net cash of SGD274m and recent partial acquisition of Staffline should contribute positively to its P&L from 3Q onwards.

Becoming a Strategic Shareholder of Staffline Group

• HRNETGROUP LIMITED (SGX:CHZ) acquired a 25.02% stake in Staffline (STAF LN) for SGD46m. The latter is a leading workforce recruitment and training organisation providing services mainly in the UK and Eire, to both Government and commercial customers.
• We understand that Staffline’s share price has plunged drastically due to ongoing internal issues and many one-off impacts on its P&L, which provided HRnetGroup with an opportunity to enter at a distress valuation.
• Staffline is expected to generate an EBIT of GBP23-28m for FY19, of which HRnetGroup should recognise 25.02% as income from associate. This, we believe, will be positive for its P&L from 3Q19. At current price levels, we think that it is extremely accretive for HRnetGroup if it could do a takeover of Staffline as it will also help expand the former’s reach to Europe.

North Asia Still Remains Strong

• Hiring from Hong Kong and China, with the inclusion of REForce remains strong, growing 7.5% y-o-y despite macroeconomic uncertainties. Although management expects some weakness in 3Q19 from the Hong Kong branch due to the ongoing protests and riots, North Asia should still continue its resilient growth into 3Q19F

Remaining Net Cash of SGD228m Provides Room for More Acquisitions

• Management is still looking for opportunities globally, and it has the balance sheet to do so. Even after paying SGD46m for its stake in Staffline, we expect HRnetGroup to have remaining net cash of SGD228m, of which SGD148m could be used for other acquisitions.
• We believe the company could also utilise gearing as a strategy, which will be further accretive.

Maintain BUY and TP of SGD0.94

• Due to the ongoing trade war issues, management revealed that as some companies are holding off hiring while awaiting the trade talks to settle. As such, it noticed some weakness in its business in 2Q19, especially in Singapore. However, with earnings from the recent acquisition expected to kick in 3Q19, it should mitigate the drop in HRnetGroup’s core businesses.
• Coupled with more potential accretive M&A, we maintain BUY on this counter.

Source: RHB Invest Research - 14 Aug 2019