Adeline Sim, the Executive Director and Chief Corporate Officer of HRnet was recently interviewed by the Securities Investor Association of Singapore (SIAS). Three things stood out to me:
- Co-ownership driving growth and cost control
- Resilient but not recession proof
- Consistent organic and M&A growth
First, HRnet’s co-ownership plans has helped to make the company resilient and cost-conscious. 77% of HRnet shares are owned by employees so everyone is focused on growing profits. Unlike most listed companies, 10-15% of many HRNet subsidiaries are owned by employees. There are 37 co-owners now. The personal income of these 37 leaders are mainly driven by dividends from their equity stakes in the subsidiaries rather than their salary and they invest at least SGD300,000 each for the shares. This co-ownership culture leads to tight cost control. There are no receptionists. Employees are happy to fly economy class and share hotel rooms because they are incentivised to maximise profits During the pandemic, HRnet subsidiaries were quick to pivot to new business opportunities such as providing flexible staffing for vaccination centres, hopsitals and temperature screening.
HRnet has performed well during the pandemic with the company remaining profitable. This is consistent with the company’s 30 year history where revenue and net profit reached new highs after each crisis. The company isn’t recession proof though because professional recruitment activity typically tapers off during periods of economic uncertainty.
HRnet has two advantages over its smaller peers during recessions. Firstly, the company has a huge cash position which allows the company to offer more flexible staffing resources during a recession. HRnet had to deploy SGD40 million of cash in the first half of 2021 because of a big jump in demand for temporary workers. Flexible staffing is capital intensive because recruiters have to pay their flexible staffing employees first and are typically paid by customers only 60 days later.
Secondly, HRnet is careful about providing flexible staffing services to customers with weaker credit profiles. Such customers may have to make payments upfront. HRnet’s profit sharing system is also helpful for aligning incentives among flexible staffing recruiters because gross profit sharing is based on cash profits and not accounting profit. As a result, HRnet recruiters are incentivized to ensure that their customers pay on time.
HRnet is keen to expand into more North Asia cities because of growing customer requirements. The company will only expand into new cities if existing customers request their presence and if they can find HRnet leaders who are willing to reloate to these new cities.
The company’s M&A track record has been mostly positive. New acquisitions in Jakarta (HRnet Rimbun), Shanghai (REForce) and Hong Kong (Center Point Personnel) have done well with these acquisitions seeing a 47% CAGR in net profit while the overall return on investment is 41%. Joint ventures with some acquired companies have also performed well. HRnet formed a Jakarta flexible staffing joint venture with HRnet Rimbun in 2020 and this joint venture was profitable within six months. HRnet is open to more M&A opportunities.
HRnet’s investment in Staffline, a UK flexible staffing company was the main exception to their good M&A track record. Staffline’s revenue and profit fell dramatically after their initial investment with the company losing important customers after Brexit. Staffline’s revenue recently improved which has resulted in HRnet increasing their position. HRnet currently owns 15% of Staffline.
I’m always impressed whenever I learn more about HRnet but I’m not sure if they have a moat. HRnet definitely has scale advantages because of their strong net cash balance sheet and profit-focused culture but there are other recruiters which are much larger than HRnet too. Culture is usually not viewed as a moat because it’s unclear if culture will persist once there’s a change of management. I think HRnet’s focus on cost control and resilient growth is likely to last as long as management maintains existing co-ownership and profit sharing plans.
I’m happy to keep watching my HRnet position before adding because most recruitment companies have cyclical earnings and are not known for being steady compounders. Robert Half is the main exception – their share price is up 478x since 1982. Can HRnet continue growing revenue at double digit rates? Their overseas units will have to keep growing because their Singapore operations seem mature.
What do you think? Did I miss out any recruitment companies which have been huge multi-baggers?