Okay, at first glance, I never thought much about this Singapore stock.
Except for the fact it currently pays a 6.5% dividend yield.
Other than Singapore banks and REITs, you typically won’t see many Singapore stocks paying you that kind of dividend yield.
Yet, I was amazed how much cash HRnetGroup has. And almost zero debt. I mean, for a S$780 million market cap company, this is quite impressive.
Let’s take dive in, shall we?
HRnetGroup — a Background
HRnetGroup is an unassuming name. It’s easy to look pass this company. What struck me though, as I looked deeper, was how fast they grew.
Now, HRnetGroup was founded in 1992, then quickly expanded to Malaysia in 1994, and eventually got listed in 2017 — having raised S$174 million in an IPO. Even Temasek also took a stake during its pre-IPO.
Today, the recruitment giant has a stable of well-established businesses – including HRnetOne, Recruit Express, PeopleSearch, RecruitFirst , SearchAsia and PeopleFirst.
Even though it’s not a blue-chip, I found it remarkable HRnetGroup could dominate its market way before its IPO – beating other more prestigious recruitment companies.
Source: HRnetGroup’s IPO Prospectus
Here’s my sense of the company: I think HRnetGroup has gumption to grow, and being able to adapt quickly across various sectors in the recruitment market.
In fact, HRnetGroup’s recruitment tentacles have extended across the popular sectors in Singapore (see chart below by revenue contribution).
Source: HRnetGroup’s 1H2022 Financial Results
According to a DBS Research Report: “During the IT boom in 2017, HRnetGroup quickly adapted its business and increased its revenue contributions from the IT sector from 14% in FY16 to 18% in FY17. This was aided by a business alliance agreement with TechnoPro Holdings – Japan’s largest technology-focused staffing company.
Owing to its highly diversified business, HRnetGroup was also able to quickly pivot to the healthcare life science segment, as there was high staff demand at testing and vaccination centres in 1H21. Consequently, revenue contributions from the healthcare life science segment jumped from 14% in 2H20 to 26% in 1H21.”
HRnetGroup’s secret sauce? Flexible staffing
I admit, HRnetGroup isn’t the best Singapore company out there. It’s not a blue-chip.
But they have built a somewhat “cash flow recurring” business, which not many people may know.
I found HRnetGroup isn’t just doing recruitment. It has what’s missing for many recruitment companies – a massive flexible staffing business.
The thing is, its flexible staffing allows companies to recruit contractors easily – whether it’s for a short-term project, or a temporary replacement to permanent hires.
Plus, the company has over 54,000 contractors that companies can pick from. More importantly, HRnetGroup doesn’t even need to pay for their contractors.
Put it this way, when a bank hires a contractor from HRnetGroup, the bank pays the full salary, plus an additional fee to HRnetGroup for hiring the contractor.
In a sense, this makes it an asset-light business – no need to build factories, nor invest in expensive software and technologies. HRnetGroup simply grow their headcount, in order to grow their profits.
Right now, flexible staffing segment contributes at least 43% of HRnetGroup’s total gross profits. And that grew from a 32% contribution over the last few years.
Source: HRnetGroup Annual Report 2021
HRnetGroup’s surprising ability to grow overseas
Another thing I found surprising — HRnetGroup’s ability to grow beyond Singapore. While half of their revenues came from Singapore, the other half was across North Asia. In my view? Not many Singapore companies can scale overseas.
Especially in recruitment, where foreign players tend to lose out to domestic players with “local” knowledge.
About 30% of their revenues come outside Singapore — including Greater China, Japan, South Korea, Malaysia, Thailand and Indonesia.
Source: HRnetGroup Annual Report 2021
In its latest half year result, HRnetGroup did pretty well. Their revenues grew 14%, while net profits maintained at around S$37 million. Such businesses are heavily driven by human capital. Most of their costs come from labour.
That’s why, what I’ve always liked about such business that could gush cash flow, without adding too much capital – building factories, hiring heavy equipment and so on — into the business.
Source: HRnetGroup Annual Report 2021
Clean balance sheet – huge cash pile, zero debt
I was surprised at how clean HRnetGroup’s balance sheet is – almost zero debt. Most of their liabilities are payables owed to suppliers, which can easily be paid down from their invoices and receipts.
The company also has a huge equity and massive cash pile of close to S$312 million. The huge cash pile allows them to continue to expand overseas.
More crucially, it also allows them to grow their dividends, and buy back shares years after they IPO.
Source: HRnetGroup 1H2022 Financial Presentation
HRnetGroup — more dividend than a growth play
Havings said , what caught my attention is HRnetGroup’s dividend has been pretty strudy. It grew dividends from 2.3 cents in 2017, to 5.13 cents over the last 12 months.
I mean, that’s pretty healthy for a Singapore corporate, especially shares trade at a 6.5% dividend yield. Not too bad.
Management has said it will continue to maintain its dividend practice of paying at least 50% of its net profits as dividends.
While HRnetGroup doesn’t have the strong growth of a tech company, it does make up for a more consistent source of cash income for investors.
What I don’t like about HRnetGroup
Now, what I don’t like and don’t understand is – why are they investing their excess cash into the stock market? They have about S$47 million invested in financial assets, which really doesn’t make sense to me at this point. Look, it’s not like their business have slowed.
The thing is, HRnetGroup’s return on equity (ROE) is an average 15% between 2017 to 2022. ROE is a measure of a company’s capital-efficiency – for every dollar pumped back into the business, how much more profits can the company yield.
And HRnetGroup’s ROE, by my standard, is actually good. So why even bother with the stock market?
My Final Thoughts — Intense competition still remains
The recruitment market in Singapore is saturated. HRnetGroup has already fortified its position as a market leader. Thus, it’s probably much tougher to grow market share here, considering the low barriers to entry.
Hence, there’s a strong need to go overseas. While HRnetGroup’s revenues are diversified across Asia, there’s strong competition as recruitment is largely a localized business – foreign companies tend not to monopolize a foreign market, and usually plays a more niche area within the recruitment market.
Here’s the other thing. While the Fed’s rising rates isn’t affecting HRnetGroup, the intention to shake up the tight labour market could be a big reason HRnetGroup could see some potential risks ahead.
As companies start to freeze headcount, lower their budgets ahead of a market recession, HRnetGroup could see some potential risks.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
I hold this stock since 2019. Good dividend stock to strengthen your stock portfolio.
Nice one!