HRnetGroup has launched pre-marketing for a Singapore initial public offering that will represent the first major flotation of a recruitment services firm in Asia outside Japan.
The prospective deal should also provide much-needed diversification for the Singapore Stock Exchange, which has struggled to find companies beyond the property and oil & gas sectors in recent years. The cancellation of a S$190 million deal ($134 million) for food group Viz Branz in late March did not help in this respect.
HRnetGroup's all-primary-share IPO is shaping up to be of a similar size, with syndicate research assigning a fair value range between S$843 million and S$1.33 billion. At a rough S$1 billion mid-point, this points to an IPO of around S$200 million based on a 20% free float.
At this level, syndicate analysts have assigned a valuation of 21.6 times forecast 2017 earnings, 9.5 times 2017 forecast EV/Ebitda and 3.6 times 2017 price to book.
This places HRnetGroup above global averages.
Benchmarking the deal is complicated by the fact that there are no listed recruitment groups on Asian stock exchanges outside Japan. There are a handful of Chinese groups, listed in the US such as 51jobs and Zhaopin, but they have different business models based on online search.
HRnetGroup is based in Singapore, but has a pan-Asian presence in 10 Asian cities covering Singapore, Kuala Lumpur, Bangkok, Hong Kong, Guangzhou, Beijing, Shanghai, Taipei, Seoul and Tokyo.
It also has 10 brands including HRnetOne, RecruitFirst, PeopleSearch and SearchAsia.
Its business model differs to the listed Chinese operators in being split between fee-based professional recruitment of senior to mid-level managers and flexible staffing of junior and contract workers (an average of 10,500) whose contracts, payroll and remuneration is handled by HRnetGroup for a fee.
Achieving a Japanese level valuation
The second complicating factor is a valuation differential between Japanese-listed comparables and those traded in developed Western markets across the US, UK and Continental Europe.
In Western markets, groups such as London Stock Exchange-listed Hays Group and New York Stock Exchange-listed Manpower group tend to trade in the mid to high teens on a forward p/e basis.
By contrast, Tokyo Stock Exchange listed groups such as Recruit Holdings and Temp Holdings are trading at respective forward multiples of 40 times and 29 times based on Friday's closes, while Jasdaq-listed en-Japan Inc was trading Friday around the 28.7 mark.
The Japanese groups are also trading at higher price-to-book value multiples ranging from 4.6 (Recruit) through to en-Japan (5.2 times).
Key will be how close HRnetGroup can get to the Japanese valuations, which are being driven by the country's unique demographics (growing demand for temporary workers to combat a falling working age population) and culture (more temporary workers to ease the pressure of long working hours).
Recruit Holdings, for example, has done spectacularly well since it listed on the TSE in October 2014 at Y3,100 per share. The company aims to become the world's largest HR manager and has been on an international M&A spree, which has included a US online search company, Indeed.
On Friday, it closed at Y5,960, up 71.8% on a one-year basis and 27.08% year-to-date, giving it a market capitalisation around the $29 billion mark.
HRnetGroup is far smaller and on a market cap basis will be similar in size to en-Japan.
According to syndicate briefing materials, it generates the bulk of its revenues from Singapore; 76% in 2016 compared to 22% from North Asia and 2% elsewhere.
It wants to use IPO proceeds to further strengthen its presence in Northern Asia and broaden its sector coverage.
Its most recent financial data show that it generated 75% of its revenues and 32% of its gross profit from flexible staffing and 25% of revenues and 68% of gross profit from professional recruitment.
Net profit is forecast to grow by a compound average growth rate of 11.8% between 2016 and 2018. In 2016, it stood at S$41.1 million.
One key driver will Singapore’s GDP growth, which is closely correlated to job creation and the group’s ability to push further into faster growing markets like China.
Where sector coverage is concerned, there is currently a fairly even split led by financials services on 16%, followed by retail and consumer, manufacturing and IT and telecoms all on 14% each. It wishes to further penetrate healthcare and hospitality.
Top five clients accounted for 14.1% in 2016, led by a Singaporean bank on 3.1%, a telco on 2.8% and an international bank on 2.5%. Clients include Fubon Bank, Samsung Asia, Olympus and Seibu Holdings.
In its marketing materials the company points to its employee-owned and profit sharing business model as a defining feature in a market dominated by international search firms. It says this is one of the reasons why it has such a high level of net profit per employee.
Pre-deal, the founding Sim family owned about 73%, while 22 co-owners owned 5% and 500 employees will own a further 5% post deal. Temasek-owned Heliconia Capital spent S415 million for a 2.31% stake of the group's enlarged share capital in October 2016.
Pre-marketing of the deal will continue in Hong Kong and Singapore through to May 24, with a public offering scheduled for late May/early June and listing in mid-June.
Joint bookrunners are Credit Suisse, DBS, Deutsche Bank and Nomura.
