Investment Highlights

• We retain our FV of RM0.55/share (based on an FY18 PE of 14x) and earnings projections for Sasbadi but upgrade it to a BUY (from HOLD).

• We believe the stock has been oversold, declining 54% since the beginning of the year to trade at a forward PE of only 8.4x currently vs. historical PEs of 18-21x in the past two FYs.

• Our projections are conservative given the tough conditions of the retail market. We are projecting for an FY18F net profit of RM17mil, a mere reversion to the group’s FY16 results.

• While 1Q earnings were flat YoY, margins were intact. 2Q results are expected to come in stronger given the seasonal period of higher demand for books, marked by the start of a new school year.

• The group has announced the following contract wins:

1) A RM4.8mil contract from the MOE to supply the science textbook for Form 3 in national schools, from this month to end-2020.

2) A RM1mil contract from MOE to supply the Chinese language textbook for Form 3 in national schools, from this month to end-2020.

• Sasbadi said RM5.2mil (90% of the total RM5.8mil from both contracts) will be recognized in its FY19. We assume the remainder to be equally split across the final 1.7 years of the contracts.

• We believe the RM4.8mil contract for the science textbook is Sasbadi’s largest from supplying textbooks in recent years (the average contract value stood at RM2.5mil for Sasbadi Sdn Bhd and RM1.9mil for Sanjung Unggul. It has secured 5 contracts in FY18 — 3 for Sasbadi Sdn Bhd (maths & arts for year 3 of SJKC, and science for form 3 in national schools) and 2 contracts for Sanjung Unggul (Chinese language for year 3 of SJKC and Chinese language for form 3 in national schools)

• This brings the total value from textbook contracts to RM12.3mil in FY18 from RM11.1mil, an 11% increment on a YoY basis. We expect the group to achieve revenues of RM12mil/RM8mil/RM9mil in FY19/20/21 respectively from the textbook contracts it has secured.

• We maintain our earnings projections as we had already factored in annual revenues of RM10-13mil from textbook contracts.

• We believe the group will strengthen its foundation of selling supplementary school books in the coming months to, while continuing to grow other revenue streams. It recently conveyed plans to monetize i-Learn Ace by adding new user functions, and pivoted to collaborations (to distribute Chuck Chicken and Marshall Cavendish Education products) towards this goal.

• However, we emphasize that these ventures still carry inherent risk and would take time before they become significant contributors to the group's earnings.

Source: AmInvest Research - 11 Apr 2018