Saturday, June 10, 2017

HRnetGroup Limited IPO - Is This A Good Buy?

HRnetGroup Limited is going public by offering 89.4m shares which made up of 85.6m shares under placement and 3.8m shares under the public offer.

The IPO will close on the 14th Jun at 12pm with a market cap of approximately $900m, which makes it one of the top IPO for this year in the SGX market.

The issue price is at $0.90 per share.

About The Company

HRnetGroup Limited is the largest Asia based recruitment agency in Asia Pacific with a dominance presence in Singapore.

It currently operates in a few key growth markets such as Tokyo, Hongkong and Shanghai, with a post successful IPO venturing overseas in these markets.

Unlike most recruitment firms, the company operates on an interesting co-ownership business model to align the employees' interests with the company.

The Group has two main businesses.

The first is engaging the recruitment agency (Recruit Express, People Search) by having professional recruiter place candidates on permanent positions. The other segment provides services such as payroll processing, human resource consulting and corporate service training.


On the financials, you can see that topline has been increasing steadily over the years and GP margin has remained steady at around 36% to 39%.

Their biggest "assets" in this sort of business is obviously its manpower and it is easy to see that it contributes the most overhead costs. Net Margin is at around 10-11%, which is solid.

Based on 2016 results, earnings per share (eps) is at 4.06 cents post offering and hence this translates to about 22x price to earnings.

Despite increasing bottomline, cash in balance sheet has instead decreased, mainly due to huge dividend payout they've issued pre-listing in FY2016 which amounted to $84.8m paid in dividends to shareholders (partially offset by the capital contribution of $15m received from Vanda).

The company works on an asset light business model hence no major capex to take note about.

Peers Comparison

The Group is a clear market leader here when you see how they fare against other recruitment firm in terms of net profit and net profit margin divided by per employee.

The only company which have fare better is japanese listed JAC recruitment firm which is currently trading at 20x PER.


Based on Frost & Sullivan, they estimate the industry in the North Asian cities to grow at 11.5% CAGR, Rest of SEA at 12.4% CAGR and Singapore at 4% CAGR between 2016 to 2021.

Given the Group market leader position and their intention to use the funds from the IPO to grow in the North Asian cities market, we can assume growth to be at 11.5% for the sake of our DCF valuation method.

I'm using a standard 10% on discount rate and a conservative 20x PER to match that of JAC recruitment we talked about above in the peer comparison.

The intrinsic value came up to $1.50.

Final Thoughts

The valuation at IPO are not exactly cheap at 22x earnings multiple. In fact, if you compare them against JAC recruitment right now, it is pretty rich.

Proposed dividends are estimated to be at 50% of net earnings for FY17 and FY18, which translates to about 2.2% yield.

The key here is whether that 11.5% growth over the next 5 years which the industry forecast could materialize. If yes, then at 90 cents, it will look cheap because the company could well generate about $50m in earnings, and then pay half of those as dividends to shareholders and then retained the rest of the $25m as cash in their balance sheet. 

The valuation does not take into account the potential growth from further utilization from the cash they have in their retained earnings over the years so EV will continue to get stronger as years goes by if they sit still with that cash and do nothing.

The key here is in the waiting and if you can wait 5 years before the share price goes to $1.50, that's a double digit return of about 12% for you. Adding the yearly dividend of about 2%, and you get about 14%, pretty decent.

The other key risks if that growth is going to materialize at all. One black swan or crisis and we may go back to basics.

I'm still deciding if I wanted to have participation in this. With cash running low, I need to prioritize on my strategy.


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  2. Hi Brian,

    Would the estimate of the CAGR for your DCF valuation being 11.5% be too optimistic, given that North Asia makes up only 39% of their gross profit?

    Would it be better if we used the weighted average of 4% for Singapore, 12.4% for the rest of SEA and 11.5% for North Asia, since Singapore operations contributes 57% of gross profit, and the rest of SEA contributes 4%.

    Just my thoughts, thanks! :)

    1. Hi Alpaca

      Very valid points.

      Yes my intention is also originally to use the weighted average per what you described but their plan for ipo is to use the proceeds venturing into North Asia, thats where I get the 11.5% growth, but you are right I should recompute again the revised weighted average from there and thus my growth is overly too much. :)

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