Highlights

• Sasbadi’s 1HFY08/15 earnings currently stand at RM9.9m (59.2% of our full year forecast). While its second quarter is the strongest quarter (according to school term), we expect slower quarters ahead but still higher than 1Q which is the weakest quarter for the year. Despite most of their product being zero-rated, it may experience a slight slowdown due to lower spending power. Overall, we are positive that it is on course to meet our forecast.

• Management is still committed to pay up to 50% of thei r yearly profit. As such, we increase our dividend payout ratio to 40% (vs. 35%), which t ranslates to a higher dividend yield of 2.3%-3.3%. Gi ven the group’s positi ve annual free cashflow of RM10.2m-RM19.1m and net cash position of RM24.9m, we believe the payout level is achievable.

• The acquisition of a Chinese publisher is still underway, targeting to finalise in the current financial year. We believe the acquisition should be earnings accretive for the group, with Sasbadi having an appetite for companies with low P/E multiple. Moreover, it will complement Sasbadi coverage of the education spectrum as it is currently a relatively small player in National-Type Schools (Chinese).

• PT Erlangga, which uses Sasbadi’s interacti ve online learning system, should launch its online products by this month in accordance with the start of the academic year (July). Its online platform is catered for Year 7 – Year 9, which is equivalent to Form 1 – Form 3 in Malaysia. Out of the one-off non-refundable licensing income of USD300k, 30% was recognised in the first quarter of FY15, while the balance is to be recognised in the coming third quarter.

• There was a slight delay in the opening of its first learning centre in Kota Damansara. The group is aiming to have the learning cent re ready by July or August. Capex for learning centre is estimated to be around RM0.5m.

Risks

• Not winning new textbook contract from MOE; Migration towards the online platform; Spike in paper prices; and Changes in National Curriculum and educational policies.

Forecasts

• Unchanged.

Rating

BUY

Positives

• (1) Long term catalysts from potential M&As and new curriculum for secondary schools; (2) Unique exposure to Malaysia’s education system; and (3) Defensi ve earnings base.

Negatives

• (1) Not winning new textbook contracts from MOE; (2) Rising paper prices; and (3) Low liquidity.

Valuation

• Maintain BUY unchanged TP of RM2.72 based on unchanged P/E multiple of 15.5x CY16 EPS or circa 50% discount to average P/E of education sector given its lower market capitalisation and liquidity. We think valuation is justified as Sasbadi has high growth rate and holds a unique exposure to the country’s education system.

Source: Hong Leong Investment Bank Research - 4 Jun 2015