HRnetGroup Limited ("HRnet" or the "Company") is offering 89.482m shares for its IPO of which, 85.682m shares are via placement and 3.8m shares for the public offering. The IPO will close on 14 June at 12pm. The Company will have an over-allotment option of up to 11.1m shares in the event of strong demand. The IPO will close on 14 June 2017 at 12pm with a market cap of approximately S$900m. Finally, we see a mainboard listing on SGX after so long! SGX must be heaving a sign of relief.
HRnet is one of the largest Asia-based recruitment agency outside Japan with a strong dominance in Singapore. The Company operates in 10 Asia growth cities with a highly diversified base of over 2,000 premium clients. The Company said it has "104" clients out of the Fortune 500 list.
Some of the key brands under HRnetGroup are as follows:
The Company has grown its revenue strongly from S$324m to S$365m over the last 3 years and net profit has grown from S$37.9m to S$48.4m over the same period. The EPS, based on post IPO number of shares, for FY2016 is Singapore 4.06 cents. That translate into a listing PER of around 22x.
What i like about the Company
- Largest Asia-based recruitment agency in Asia Pacific (ex-Japan) - The Company currently operates in 10 Asian based growth cities and is the highest revenue generating company in the Asia Pacific. The Company has a strong base in Singapore where it generated 57% of its revenue. This will provide the stable base from which it can expand overseas
- Well diversified customer and revenue bases - That helps reduces the dependency and over-reliance on key policy matters. It is interesting to note that no single sector account for more than 16% of the Company's revenue
- Strong track record - The Company has grown strongly over the last 24 years. Revenue grew from S$94m in FY2006 to S$48m in FY 2016 over the last 10 years. In fact, the Company led by Peter Sim, has been growing the Company and leading it to greater heights over the last 20 years. It is hard to imagine that he started out as a civil servant and he has done very well for himself, including bulldozing its competitors over the last 10 years!
- Strong cashflow business - This is a highly cash generative business with positive cash flows from operating activities of more than S$53m in FY2016. In fact, i don't think the Company really need to list other than for the fact that the founder is 60 years old and listing can help ensure he builds a lasting legacy to either sell or pass on to the next generation
- Dividend paying - HRnet intends to pay out 50% of its net profit after tax for FY2017 and FY2018 as dividends. Assuming EPS grow by 7% from 4.06 to 4.34 cents, that will translate into a dividend of Singapore 2.17 cents, implying a relatively decent yield of 2.4%
- Strong list of pre-IPO and cornerstone investors - It is good to see Heliconia, as well as asset managers such as Aberdeen Asset Management, Affin Hwang, Credit Suisse and en-Japan, FIL, TechnoPro etc agreeing to be cornerstone investors. This bodes well for the Company and will probably help ensure there will be strong market support post its listing. The fact that HRnet went bookbuilding at between 80c to 90c and closed the book at the top range of the bookbuilding range means that demand for the IPO is extremely strong.
- High valuation - Investors should be aware that the issuance is at a huge premium over its NAV as well as at 22x PER. This is an asset light business and investors are paying for the human capital that generates the profits
- Ability to retain talent - The ability of the Company to retain talent is critical as that is where the profits are generated. While the prospectus mentioned that they have a strong incentive scheme that aligns the interest, nevertheless, this is a pretty mobile and relationship business. There is nothing to prevent employees from leaving the Company and starting a new recruitment business elsewhere
- Tightly controlled company - With 73.35% controlled by SIMCO Global Ltd and the balance held by cornerstone or strategic investors, the public only hold 8.85% of the Company. Investors will have expect that liquidity will dry up over time and to trust the management to instill good corporate governance at the Company
- Execution risk - It is always easy to sell the North Asia story but definitely not easy to "carry it out". The ability of HRNet to execute its stated strategies in North Asia will be the key risk for me
My Fair Value
It is not easy to find local comparables in this sector as HRnet is a market leader in Singapore and Asia. In fact the study from Frost showed that it is a better run company vis-a-vis its peers in Asia. It is also interesting to note that en Japan Inc and TechnoPro are taking cornerstone stakes in the Company. This is probably a strategic investment for them, with a view to acquire HRNet in future should the Sims decide to cash out.
This is definitely not a value buy but an opportunity to invest in such quality company is also hard to come by in Singapore. In this regard, there should be a "scarcity" premium. Assuming an EPS of 4.34 for FY2017 and a PER range of 28-32x, the "fair value" should be around Singapore 121 to 138 cents.
Assuming a lower PE range of between 22-25x, the fair value should be 95 cents to 108 cents.
My Chill ratings
Given that it is priced at the top end of the range, with a strong set of cornerstone investors and richly traded peers, i believe HRnetGroup will debut very well. I quite like the Company for the reasons provided and would have given it a 3 chilli rating if not for the rich valuation. It is a 2 chilli rating for me and investors who apply at the ATM should be able to exit at a good profit.