HRnetGroup enters UK via an opportunistic buy of Staffline; diversifies risks with new markets
Singapore Exchange Mainboard-listed recruitment company HRnetGroup, which has built a strong presence in Asia, can now consider the UK a key market segment as well after it made what it called an opportunistic acquisition.
On Sept 5, the group acquired voting rights of 4.93% in Staffline for £5.4 million ($9.21 million), just weeks after its previous purchase of 11.7 million shares at 180 pence each on Aug 1, which at that time gave it voting rights of 24.89% in the London-listed recruitment company. Staffline focuses on blue-collar flexible staffing and workforce training for government and commercial clients such as retailers Tesco, Sainsbury’s and Marks & Spencer.
The price HRnetGroup paid was a premium over the last traded price of 100 pence. However, just seven months ago, at end-January, Staffline was trading at more than 1,000 pence. Coupled with an existing prior stake of 5.5 million shares, HRnetGroup, with a total stake of 25.02%, is now Staffline’s single-largest shareholder. In an interview with The Edge Singa
pore, Adeline Sim, executive director of HRnetGroup, calls the $46.4 million acquisition, paid using cash, purely “opportunistic and timely”, as it “coincided with the drop in the value of the British pound”.
Sim, who attended the interview with HRnetGroup’s chief financial officer Jennifer Kang, says the acquisition was done after studying the company carefully and talking to people on the ground. “As an industry player, we [understood] the circumstances that gave rise to Staffline’s predicament and, following discussions with the management, were convinced that its fundamentals were in place and that it was a company we could work with,” she says.
Staffline generates the UK’s largest placement volume of about 60,000 workers a day, and HRnetGroup wants to grow this figure.
At the start of the year, Staffline, set up in 1986 and listed on London’s Alternative Investment Market since 2004, was in the headlines for underpaying workers. Staffline reportedly had not included for payment the time taken by workers in food production facilities to change in and out of their workwear, as required by the UK’s Britain’s minimum wage law.
The company’s shares were subsequently suspended for six weeks from February. When Staffline eventually reported its FY2018 earnings in June, it recorded a loss of £9.6 million compared with earnings of £24.1 million for FY2017. Revenue in the same year was up 17.7% to £1,127.5 million.
Sim and Kang say their priority is to build on HRnetGroup’s foundation as the UK’s only listed recruiter and tap new technologies such as its AI chatbot to drive efficiency and provide a better experience for both jobseekers and employers.
Besides job placements, Staffline has another significant business activity: training. It does so via PeoplePlus, an adult skills and training provider in the UK that conducts apprenticeships, adult education,
prison education and skills-based employability programmes across the country.
Casting net wide
Sim and Kang are looking for other companies they can collaborate with and eventually acquire. Similar to their game plan with Staffline, they are taking their time to understand a company before deciding whether to acquire or work closely with it. “We always talk to the people on the ground to understand the general perception of the employment market,” says Kang. “Unlike funds, we do not just invest. We go down to the company and see their operations and how their people work.”
HRnetGroup is casting its net wide as well. Sim says she does not want to confine the company to a particular market, adding that the company will go where its clients bring it. For now, it is looking to deepen its presence in China and Japan, but is also on the lookout for opportunities elsewhere.
Following the Staffline acquisition, HRnetGroup’s share remains relatively high at $228 million — a decent war chest for further acquisitions. HRnetGroup has also been using its cash to steadily buy back its shares from the open market. Most recently, on Sept 3, it bought 70,000 shares at 57 cents each, bringing the total number of shares it bought in recent weeks to 392,000 shares. The buybacks are to help support the share price and indicate the company’s “confidence in the business and stock”, a spokesperson tells The Edge Singapore.
From its Singapore home base, HRnetGroup has expanded to more than 30 places worldwide, including Malaysia, Thailand, Indonesia, China, Hong Kong, Taiwan, Japan, South Korea and, via Staffline most recently, the UK. It is described as the largest recruitment agency in Asia-Pacific, excluding Japan. It operates different brands in different markets and market segments. The list includes HRnetOne, Recruit Express, PeopleSearch and RecruitFirst. In Malaysia, the company operates RecruitFirst Malaysia, and in Shanghai, RecruitFirst Shanghai.
Softer outlook
Despite its operational heft, the company’s most recent results showed signs of weakness. For its most recent quarter, 2QFY2019 ended June 30, HRnetGroup reported revenue of $108.5 million, up 0.5% y-o-y. However, earnings came in at $11.5 million, down 11.5% y-o-y. Sim attributes the decline to lower margins from its flexible staffing segment.
With Singapore’s GDP growth slowing and prospects of a technical recession likely, the outlook is equally gloomy for HRnetGroup. For the 2Q, the company’s gross profit from Singapore dropped 10% y-o-y to $1.1 million. By contrast, its overall gross profit, which includes contribution from markets outside Singapore, dropped 4.3% y-o-y to $39.8 million.
The muted earnings have caused HRnetGroup’s share price to drop. The company went public at 90 cents in June 2017, but its stock closed at just 56.5 cents on Sept 5, giving the company a valuation of $569.1 million. At this level, HRnetGroup is trading at a historical price-to-earnings ratio of 11.84 times. While it is not giving out an interim dividend, its earnings for the first half of the year translate into earnings per share of 3.06 cents on a fully diluted basis, compared with 2.89 cents in the previous year. On a quarterly basis, EPS was 1.14 cents, compared with 1.28 cents a year ago.
While Sim and Kang are prepared for the continued decline in recruitment if global economic uncertainty prevails, they expect one segment to grow: flexible staffing. Hiring temporary workers instead of filling permanent positions is a way to manage costs. HRnetGroup’s key strategy is to continue to expand overseas. By operating in different markets, weakness in certain markets can be offset by growth in other markets.
Four brokerage houses — RHB, DBS Bank, Credit Suisse and CIMB — maintain active coverage on the stock, with three out of the four giving “buy” or “add” calls, with price targets that range from 94 cents to $1.01.
“Earnings from the recent acquisition [are] expected to kick in in 3QFY2019, and it should mitigate the drop in HRnetGroup’s core businesses,” says RHB analyst Jarick Seet, who has a “buy” recommendation. CIMB also has a “buy” call, following expectations of the group’s stronger performance. “We continue to like the stock for [its] acquisition-led growth for FY2019FY2021F, strong net cash position ($228 million post Staffline investment) and 4% dividend yield,” notes analyst Ngoh Yi Sin, who adds that rising contribution from overseas markets could be another growth driver.
DBS analyst Alfie Yeo, however, recommends holding the stock at the price of 75 cents, following the weaker economic outlook for Singapore, a key market for the company. “The downturn in the economy, leading to lower job turnover and opportunities; departure of teams of recruitment consultants and, or, top management; competition; execution of inorganic growth opportunities, particularly integration” are key risks facing the company, he notes. E