Highlights

• We recently visited Sasbadi to attain more information post 1QFY15 results. All in all, we left with a better understanding of the company, and we feel more confident and have reaffirmed our positive stance on the company’s future prospects.

• 1QFY15 review… 1QFY15 - a seasonally weaker quarter. Moving forward, we expect higher earnings contribution from 2Q, followed by 3Q as students purchase new books for the beginning of the new school term. Historically, 2Q contributed ~50% on average for each financial year.

• Expansion plans on schedule… Its M&A plan are on track. We believe a Chinese publisher would be the next M&A target given that Sasbadi does not have market presence in National-Type Schools (Chinese).

• Excluding the earnings accretive acquisition(s), we anticipate its print publication segment is able to sustain organic growth of 10%-15% pa. The company will likely produce about 1300 titles compared to 1150 titles last year.

• Gamification of education... During Baca World 2015 exhibition, Sasbadi soft launched its ‘interactive bookmark’ - a combination of tutorial videos, quizzes and games that is embedded in a bookmark which will come to life by scanning a QR code (Figure #2).

• Plentiful upside from online segment… To date, Sasbadi has a large subscriber numbers across all of its online platforms. The collaborative effort between Sasbadi and Penerbitan Erlangga will provide a growth stimulus to its online educational segment.

• Learning centre to open soon… Currently in the designing stage, Sasbadi’s first learning centre will commence operation by 1H2015 in Kota Damansara. The learning centre, which focuses on science, technology, engineering and mathematics using robotics, will cater to pre-schoolers up to secondary school students.

• With STEM Education (Science, Technology, Engineering and Mathematics Education) gaining more attention, we believe the establishment of learning centres would be positive for Sasbadi’s business structure (government’s target is to have 60% of our students practicing STEM Education).

Risks

• Losing contracts from MOE; Spike in paper prices; and Changes in National Curriculum and Educational policies.

Forecasts

• Increase earnings by 6-7% as we take into account higher contribution from the print publication and online segment.

Rating

BUY

• We upgrade the stock to a BUY. We like Sasbadi due to its stable business structure, long term catalysts based on the new curriculum for secondary schools from 2017 onwards and its potential M&As. Overall, we are optimistic on its long term earnings growth.

Valuation

• Upgrade to BUY with target price of RM2.06 based on 15x CY15 EPS or circa 50% discount to average P/E of education sector due to Sasbadi’s lower market capitalisation. We believe the valuation is justified as Sasbadi has a high growth rate and holds a unique exposure which is closely linked to the country’s education system.

Source: Hong Leong Investment Bank Research - 6 Mar 2015