Highlights

• We met up Sas badi’s CFO Mr. Tang Yuen Kin last week, some key takeaways are as per below:

• The slightly tepid results were due to higher resources used for the textbook tender participation. Excluding Sanjung Unggul, its applied learnings products and online division, the group actually recorded 11% decline yoy in gross profit. The decline in earnings for Malaysian Book Promotions was partly due to rebranding of some titles to Sasbadi Sdn Bhd.

• Out of the 26 textbook tenders (see figure #1 below) Sasbadi won RM9.4m in total. These textbooks are to be delivered and used 2017 onwards.

• The group’s opening of its first learning centre in Kota Damansara in 2HCY16 will be delayed as management is currently relooking at its business model. Though slightly delayed, we still believe the establishment of the applied learnings cent res would be beneficial for Sasbadi in the future as STEM Education (Science, Technology, Engineering and Mathematics Education) is gaining more traction in Malaysia.

• Despite being in a recession proof business, we believe the group would be slightly affected by the weak purchasing power and tough business environment. Hence, we are expecting a softer 2H16 for the group.

• Also, note that the take up rate for the online educational products sold by PT. Penerbit Erlangga is slower than expected (based on the LSA, Sasbadi will receive royalties semi-annually based on net sales received by PT. Penerbit Erlangga).

• Excluding Sanjung Unggul, we anticipate an organic growth of high single digits. Sasbadi’s di rect selling business , Mindtech Education S/B which focuses on selling and consumer education on the group’s di gital/onli ne educational products, has recorded approximately 700-800 memberships. We believe this would provide growth impetus for the group’s online segment.

Risks

• Migration towards the online platform;

• Spike in paper prices; and

• Changes in National Curriculum and educational policies.

Forecasts

• FY16 earnings forecast is slightly reduced by 4% as we expect softer 2H for Sasbadi.

Rating

• BUY

• We like Sasbadi due to its strong annual FCF, high growth rate, its innovativeness in creating products that cater to tech-savvy youth and unique education exposure which is closely linked to the country’s education system.

Valuation

• Reiterate BUY with TP of RM1.55 based on P/E multiple of 18x CY17 EPS. Targeted P/E is based on a discount of 40% to education sector. Valuation is justified in our view, due to Sasbadi’s rel ati vely small market capitalisation and low liquidity.

Source: Hong Leong Investment Bank Research - 20 Jun 2016