(Stocks Discussion) SGX: HRnetgroup Ltd (SGX: CHZ)?

TL;DR The financials of the company seems quite strong, just that free cashflow is weak due to high reinvestment needs. With the Asian economies playing a more central role globally, HRnetgroup might be posied to take advantage of such growth.

Business Profile

Source: HRnetgroup

The firm is a leading recruitment and staffing firm in Asia which operate in 10 Asian growth cities. Currently, their focus is on growing cities with a high level of commercial activities and job opportunities that have a young and large population. They are also one of the Largest Asia-based recruitment players in the Asia Pacific (excluding Japan) with dominance in Singapore.

Income Statement

For 2018, the company has strong profitability margins, which was aided by low depreciation as well as interest costs. Moreover, earnings and revenue have been increasing steadily over the last 3 years. The profitability margins themselves all have improved too. These are all very healthy signs.

Balance Sheet

HR Net's balance sheet is very strong too. Their short-term liquidity is very high, while they hold very little debt. However, the business could be hoarding too much cash, as evidenced by their high cash ratio of 4.6. This could be a bad sign that the firm isn't very efficient in its use of such capital. These metrics have also improved greatly over the last 3 years too.

Free Cashflow Analysis

The firm's free cash flows don't seem very high though. This is mainly due to the very high reinvestment rate of the firm. For 2018, this rate was almost 20 times higher than in 2017! This had resulted in a free cash flow margin of only 5%. Year on Year, there have been quite a lot of improvement in NOPAT and working capital conditions, which increased the FCF. However, the higher reinvestment means that more cash flow was used up. However, since the firm holds almost no debt, all the free cash flow are cashflow to equity. The risky part is how dividends paid out was higher than this figure, as they seem to have been in previous years. This means that dividends may not be very well sustained into the future unless free cash flow improves.

Efficiency

As a whole, the firm is quite efficient in its use of resources. However, these figures have weakened over time. For ROE, this low figure is caused due to a high book value of equity relative to assets as well as asset turnover being fairly low. This despite the firm having quite a high net profit margin.

As a whole, the firm is very efficient in its use of capital, as determined by the ROC. If we take Reinvestment % multiplied by the ROC, the growth in earnings would be very high. I would add that because the firm's "assets" are its technology, human resources and intellectual capital, such resources aren't displayed on the balance sheet. This would allow the firm to be more efficient in their use of capital.

Valuation

The valuation of the firm seems rather high. For the P/E ratio, this seems rather neutral, but the PEG is very high, which could suggest overvaluation. P/B ratio seems rather alright, with the accompanying ROE being fairly good as well. P/S ratio seems good, based on the companion ratio of net profit margin is high. EV/EBITDA seems very high, with the companion ratio of Reinvestment rate being very high too. EV/SAles seems high, but this might be justified with NOPAT margin being. EV/Capital is low, which is helped by the high ROC. Overall, the firm's free cash flow to EV to FCFE to MV seem bad. This suggests that the firm is currently not generating much cash flow for its current valuation. This could be an indicator that the market might price this share as a growth stock since it would be future cash flows that investors are really after.