Investment Highlights

• We maintain our HOLD recommendation on Paramount Corporation (Paramount) with a higher fair value (FV) of RM0.74/share from RM0.73/share previously after taking into account lower net debt following the sale of its pre-tertiary education business. Our FV is based on a 55% discount to its RNAV (Exhibit 4) and a neutral ESG rating of 3 stars (Exhibit 5).

• We raise our FY22F/FY23F/FY24F core net profit (CNP) by 3%/2%/2% to factor in lower interest expense with the group’s borrowings expected to be reduced from the disposal proceeds of its pre-tertiary education business.

• Paramount has entered into a conditional share sale and purchase agreement (SPA) to dispose all its remaining equity interests in Paramount Education (PESB), Sri KDU Klang (SKK) and Sri KDU (SK) to XCL Education Malaysia (XCL) for RM120mil (Exhibit 1).

• To recap, Paramount completed its first disposal of equity interest in PESB (70%), SKK (80%) and SK (80%) to XCL in February 2020.

• After the completion to divest its remaining shares in PESB, SKK and SK, Paramount will completely exit from pretertiary education businesses.

• From a profit and loss viewpoint, the pro forma net loss from the disposal is expected to be RM39mil (Exhibit 3) - 1.5x FY22F core net profit. However, excluding the previous fair value gain of RM94mil (recognised in FY20) on those assets from the calculation, the sale would have generated a net gain of RM55mil (Exhibit 3).

• The disposal is expected to be completed by 4QFY22. The proceeds from the disposal will mainly be utilised for distribution of special dividend and repayment of borrowings (Exhibit 2).

• The estimated special dividend of 12 sen/share is projected to be paid out by 1QFY23. We raise our FY23F dividend to 15 sen/share from 3 sen/share previously to include the special dividend. This translates to an attractive dividend yield of 23%.

• Upon the completion of the disposal, we expect the group’s net gearing ratio to improve to 0.47x from 0.50x.

• The proposed disposal is subject to the approval of the Ministry of Education.

• We view the disposal as positive as it is in line with Paramount’s strategy to exit the education industry, and to focus on its core business of property development.

• Presently, the group still holds 35% of the tertiary education business. We anticipate its tertiary education business to be fully disposed by FY26 with the University of Wollongong (UOW) agreeing to buy another 5% of the stake by FY23. In addition, UOW has entered into a call option agreement with Paramount to purchase the remaining 30% stake in FY24-26.

• As Paramount is currently trading at a fair FY23F PE of 10x, in line with its 4-year average, we see limited upside potential in this stock.

Source: AmInvest Research - 27 Sept 2022