Highlights

• We had a small group meeting with Sasbadi’s MD and CFO last week. We walked away from the meeting feeling neutral with no surprises.
• Not affected by rising paper prices… Although paper prices have risen by about 35% YoY to US$950-1000 per metric tonne, management guided that their papers are usually purchased in bulk one year forward. This allows them to pass on the cost increase to clients.
• Aims to boost weaker quarters with non-academic and international school products… Management guided that seasonally-weak 3Q and 4Q ahead would be supported by their new publishing IP rights (Chuck Chicken) and distribution rights on MCE-published titles (targeting international schools).
• More products needed for the MLM scheme… i-Learn Ace is growing on par with Sasbadi’s expectations and currently has around 12k agents, generating revenue of approximately RM1m monthly. However, we choose to remain pessimistic on this segment as we believe that more attractive products are needed in order for this business model to flourish.
• Educational book sales hit hard… Since 1Malaysia Book Voucher (BB1M) was being substituted by 1Malaysia Student Discount Card (KADS1M), students are allowed to spend on wider range products other than just books. The change in the fund disbursement method had adversely affected Sasbadi’s book sales in FY17.
• The Ministry of Higher Education had recently announced that students will still be receiving KADS1M this year. Hence, we opine that book sales will still be unfavourably affected in FY18, unless new measures are taken.
• Management repeatedly highlighted on a potential M&A this year. As such, we don’t discount the possibility of a cash call soon, based on its current net gearing 0.3x (net debt of RM39.5m).

Risks

• (1) Accelerated migration towards the online platform; (2) Spike in paper prices; (3) Changes in national curriculum / education policies; (4) Execution of its direct selling segment; and (5) Losing textbook contracts from MOE.

Forecasts

• Unchanged.

Rating

HOLD (↔)

• We remain neutral on Sasbadi’s earnings outlook while tracking closely the growth potentials from i-Learn Ace and advance AR educational products. We opine that it will take time before showing significant contributions.

Valuation

• We maintain our HOLD recommendation on the stock with a lower TP of RM0.50 (previously RM0.62) based a 12x, CY19 EPS of 4.2 sen. We lower our target P/E on the sector by 3x PE multiple to 12x, as we believe the core business is in a transitional phase (traditional to digital ) and will be facing more challenges going forward.

Source: Hong Leong Investment Bank Research - 15 Mar 2018