Investment Highlights

• We maintain a BUY and raise our FV for Sasbadi to RM0.63/share as we roll over to FY19F on an unchanged PE of 14x. 1H18 net profit of RM9.4mil was within expectation, meeting 56% of our FY18 projection and 58% of consensus.

• 1H18 revenue dropped 4% YoY namely due to a non-recurring robotics contract and delayed orders of reprinted textbooks totaling RM6.3mil in the previous corresponding period; revenue would have improved 7.6% if these were excluded. Its net profit margin was intact at 17% as cuts in distribution and administrative expenses partially cushioned the drop in revenue.

• 2Q18 was sequentially stronger given the seasonally higher sales, but weaker on a YoY basis due to notices from the MOE to limit workbooks for certain subjects in some levels. The weakness in print publishing was partially offset by higher revenue from its digital marketing business.

• Sasbadi said it would look to strengthen earnings from the nonacademic segment in the next two quarters, namely with contributions from the Chuck Chicken branded products and the distribution of Marshall Cavendish books.

• To this end, it also announced that its subsidiary United Publishing House (UPH) will buy Pinko Creative, a publisher of Chinese-language comics, for RM860K. This will help Sasbadi to raise its presence in the market of Chinese-language comic book publishing.

• Pinko Creative has been profitable for at least two years and made a net profit of RM299.5K in 2017. It is held by a husband-and-wife pair who each own an equal portion of the 50K in ordinary shares of the company.

• The purchase price of RM860K or RM17.20/share translates into a PE multiple of 2.9x and P/B multiple of 1.1x, based on the information on net profit and net assets provided for FY17. We believe the somewhat low premium stems from the company’s age (it is only over 3 years old vs. Sasbadi’s 32 years) and its position as a small player within a highly fragmented and challenging sector (while it has been profitable, net profit dropped by a fifth in 2017).

• The acquisition will be paid with internally-generated funds. Sasbadi last had a net gearing of 0.2x on a cash reserve of RM8.3mil. It intends to complete the deal in 3 months. We believe Pinko Creative is a natural fit for UPH, which publishes dictionaries, early education materials, novels, story books, comics and school reference materials in the Chinese language.

• We retain our earnings projection given the minimal impact from the addition of Pinko Creative. The focus going forward is still on Sasbadi’s foundation of selling supplementary school books, supported by its efforts to grow other revenue streams.

Source: AmInvest Research - 18 Apr 2018