Investment Highlights

• We reduce Sasbadi to a HOLD and a lower FV of RM0.40/share (from RM0.63/share), following dismal 3Q results. 9MFY18 results were below expectations as they met only 60% of our estimate and 67% of consensus. We have cut FY18-20 earnings projections by 10-15% and pegged the stock to a lower FY19 PE multiple of 10x (from 14x).

• Sasbadi’s 3Q net profit of RM0.5mil tumbled 80% YoY and 89% QoQ. Earnings from the group’s core business of selling supplementary books are now volatile. Sasbadi attributed its 3Q performance to the festive holidays, unscheduled long breaks and zeroization of the GST after the general election.

• We draw to 4 main factors which led to the 3Q/YTD showing: (1) a significant erosion in consumer sentiment, as the group said people held back from buying and certain bookstores froze orders to clear existing stock and make assessments for other goods in their inventory which have been affected by the GST change; (2) fixed costs remain high amid topline weakness. Two key items (distribution and admin expenses) made up a whopping 33% of 3Q revenue. Note that Sasbadi actually reduced the value of these fixed expenses in its YTD period, but the proportion of these expenses to revenue was unchanged; (3) Net borrowing costs nearly doubled in YTD due to interest costs related to its recent acquisitions; (4) a flattish QoQ performance for its network marketing business due to the fasting month and small number of active distributors within a base of 13K.

• We believe conditions in the next one year will prove to be challenging for Sasbadi given three main factors: (1) the 4Q is a seasonal downtime; (2) productivity in its network marketing unit could take time to build real momentum. We understand that the group will soon launch a version of the i-LEARN Ace for students from primary 1-3, to extend its current reach from primary 4-form 5; (3) its core business is still vulnerable to external factors.

• The key point for Sasbadi will be to strengthen its foundation while continuing to nurture other revenue streams. We emphasize that the new ventures carry inherent risk and would take time before they become significant to group earnings.

Source: AmInvest Research - 27 Jul 2018