March 13, 2019

HRnetgroup’s 4Q18 topline grew 6.7% while PATMI declined 48% to SGD6.3m mainly due to a one-off revaluation loss of SGD5.7m and a one-off bad debt provision of SGD1.6m. Excluding these one-offs, core PATMI would have risen 4.6% YoY to SGD13.6m, in line with our estimates.

Management revealed it is in talks for a potential M&A, likely in Vietnam, with a company size similar to that of REForce, their previous acquisition. We learned the target company is profitable and estimate it will be accretive to its bottom-line.

In 4Q18, the company incurred a provision for bad debt of SGD1.6m, of which SGD1.3m belongs to a bike operator and the remaining SGD0.3m to a unicorn startup in Hong Kong. The company is still trying to recover the SGD1.3m amount and commenced legal proceedings. Management revealed it revised the credit allowance amount to customers to a maximum SGD0.1m, of which customers have to pay up the excess before HRNet continues to provide more services for them. There is also a weekly email announcement to highlight any potential risks of payment by their customers.

HRnet holds some securities on their balance sheet, mostly for strategic purposes, of which the majority belongs to Technopro. The correction in 4Q18 resulted in a revaluation loss for these securities. Management revealed that most of these positions have since recovered and should enjoy some revaluation gain in 1Q19.

Due to the ongoing trade war issues, management revealed that some companies are holding off hiring while awaiting for the trade talks to settle and have noticed some weakness in their business in 1Q19, especially in China. As a result, we lower our FY19F and FY20F PATMI by 5 and 6%, resulting in a lower DCF-backed TP of SGD1.06 from SGD1.18. With SGD290m in net cash, a 3% dividend yield and potential upcoming accretive acquisitions, we maintain BUY. Target price S$1.06

HRnetgroup closed at: S$0.79