Investment Highlights

• We downgrade Sasbadi Holdings (Sasbadi) to HOLD and cut our fair value to RM0.90/share (from RM1.30) based on a lower PE of 22x — at par to its two-year average historical forward PE.

• The group posted a surprise net loss of RM4.2mil in its 4Q17 as both sales and margins for its academic books fell tremendously. This was attributed to poor market conditions and seasonal factors. Book sales under its namesake were down nearly 50%YoY while sales by Sanjung Unggul dropped 3%YoY during the quarter.

• The 4Q loss took the group to a net profit of RM8mil in FY17, down 52%YoY. The flat revenue was coupled with high fixed costs (operating expenses spiked 2ppts to 31% of revenue; these mainly comprised staff costs and costs from its first financial year of consolidating United Publishing House Sdn Bhd).

• Growth prospects for its i-LEARN Ace product remain bright. Revenue of Sasbadi Online doubled on a QoQ basis to RM2.4 mil in 4Q17, after four flat quarters. It now has around 9.5k distributors and is on track towards building a critical mass; the potential is enormous given the base of 4 million students that can utilise the product.

• Moreover, we find some assurance from the group's existing pipeline of MOE contracts for school textbooks. It has 7 contracts that it will continue to serve for at least another two years.

• However, we are now concerned for the group's core business of selling supplementary school books. The substantially lower revenue and margins seen in 4Q17 for Sasbadi Sdn Bhd and Sanjung Unggul hint that a rebound will be hard-fought. Without this foundation, the growth prospects for its digital products and upcoming ventures would be a hard sell.

• We cut our FY18-20 net profit projections by 7-22% given our more conservative outlook for Sasbadi's book sales.

• While the group did not declare a second dividend as anticipated, its FY17 payout of 1 sen/share (vs. 2.3 sen in FY16) amounted to 52% of EPS (exceeding the previous year's 36% and expectations of 30-40%).

Source: AmInvest Research - 1 Nov 2017