Asia Pac largest recruitment agency is going IPO!

After a long dry spell, SGX is finally getting its second mainboard listing in 2017 – HRnetGroup! The public offer is closing very soon at 12pm on 14 June. Should one subscribe its shares or not? What are the risk factors?

Founded in 1992 by Chairman Mr Peter Sim, HRnetGroup has grown by leaps and bounds to become the largest Asia-based recruitment agency in Asia Pacific (excluding Japan). It now operates in 10 Asian growth cities, including Shanghai, Beijing, Hong Kong, Kuala Lumpur and Bangkok, with headquarters in Singapore. Its key brands (HRnetOne, PeopleSearch, Recruit Express, SearchAsia) are widely known by the working community.

According to HRnetGroup’s prospectus, the main use of the IPO proceeds is really to penetrate deeper into its existing markets, especially the North Asia. This is intended to be achieved both organically through business expansion and inorganically through opportunistic acquisitions.

But the big question is – Is it advisable to invest in HRnetGroup IPO? For this exercise, let us look at the pros and cons of this stock.

Pros

  • The group has a proven track record of posting strong financial performance throughout its 24 years in operations
  • The business model is asset light and highly cash generative (currently in net cash position)
  • It has a very strong investor profile, with Temasek, Aberdeen and Fidelity as cornerstone investors
  • Management plans to dish out 50% of its earnings in 2017 and 2018 as dividends (using FY16 EPS of 4.06 cents, dividend yield would be at 2.2%)

Cons

  • Using FY16 EPS of 4.06 cents and offer price of S$0.90, historical P/E stands at 22x, higher than global peers such as Kelly Services and Robert Walters (~14x)
  • New investors would face an immediate 70% dilution in net asset value (NAV), as the offer price is substantially higher than its pre-IPO NAV
  • The group would still be tightly held by the Sims after listing, with free float expected to be at only 8.75%

Our Take?

HRnetGroup is a quality name and offers a unique (one-of-its-kind) exposure to the recruitment consulting space. Because of this, there is a scarcity premium tagged to the company (as depicted in its above-average P/E valuation and IPO pricing at the top of its indicative range). There are a few noteworthy downside risks to investing in the stock, but looking at its strong investor profile and low free float, there is a good chance for a strong debut when it starts trading on 16 June. This makes the risk-reward of subscribing to its IPO quite favourable, at least in the near term.

Let’s see how the stock fare on that day!