Investment Highlights

• We maintain a BUY on Sasbadi Holdings (Sasbadi) with a FV of RM2.10/share based on a FY18F PE of 24x. We believe the PE of 24x — two notches above its two-year average historical forward PE of 22x — is justified given the strong prospects for earnings. This is on par with the median PE of 24x for regional stocks with publishing and broadcasting activities.

• The salient points from our meeting with management yesterday are as follows:

• (1) Launch of franchise for STEM-oriented learning centres in FY18. These centres will offer programmes focused on Science, Technology, Engineering and Mathematics (STEM) and be positioned as an alternative to pre-schools and kindergartens (for children aged 4-6 years). We are unable to ascertain the potential earnings from this venture as plans are still at a preliminary stage. We highlight that this offers Sasbadi opportunity to derive stronger cash flows for its existing products that could be integrated into the syllabus, especially Lego Robotics. Sasbadi has so far derived ad hoc income from direct sales and sparse government contracts (the last of which was awarded in Oct 2016 and for the duration of two months).

• (2) i-Learn Ace plots a slow and steady growth towards finding critical mass. The MLM unit for the product saw 1K new distributors in May (vs. an average addition of 500/month; it has 6K now) and rakes in RM0.5mil in monthly revenue for Sasbadi. The group says it will take time to build a big enough marketplace of distributors and active users (10K at last count) for the product. We expect the revenue contribution from i-Learn Ace to grow from 6% in FY17 to 8% in FY18, premised mainly on an improvement in the number of member and units sold per member.

• (3) Sasbadi sticks to its goal of seeing one M&A annually. Its immediate targets are publishing companies within the academic space, but it plans to branch out in the longer term into areas such as lifelong learning (which covers nonacademic books for adults, leveraging brand familiarity among former Sasbadi users). Sasbadi has spent 9-25% of revenue on total capex, with the biggest amount spent on the 70% stake in Sanjung Unggul.

• We believe earnings in the next half year and beyond will be anchored to the delivery of delayed book titles from 3QFY17, the ramp-up in sales from i-LEARN Ace (for which its direct selling unit will complete its first year in June), and the steady stream of income from MOE contracts for school textbooks (existing contracts stretch up to end-2019).

Source: AmInvest Research - 2 Jun 2017