Sasbadi’s 6MFY18 core earnings of RM9.5m (-0.4% YoY) were above our expectation but below consensus. 2QFY18 performance was affected by lower book sales but was however cushioned by lower operating cost. We raise our FY18-20 earnings assumption by 7-9% respectively as we adjust for lower operating cost. We maintain our BUY rating with a higher TP of RM0.50 based on an unchanged 12xP/E multiple tagged to CY19 earnings.

Above expectation: Sasbadi’s 6MFY18 revenue of RM56m was translated into flattish core earnings of RM9.5m (-0.4% YoY), accounting for 68% and 46% of HLIB and consensus full year estimates, respectively.

Deviations: Lower-than-expected operating cost.

QoQ: 2QFY18 recorded lower revenue of 10.1%. However, earnings improved by 16.7% as it was cushioned by better margin in the result of better product sales mix.

YoY: 2QFY18 recorded a small decrease (2.5%) in revenue, mainly due to lower revenue from the Print Publishing division which was a result of MoE’s one workbook policy on main subjects for students in standard four, five and six and also forbids workbooks for students in standard one, two and three. The 5.4% fall in core earnings was due to lower margin from the Print Publishing segment (-5ppt to 59%) .

YTD: Revenue decreased by 4.1% mainly due to the non-recurring contract of RM3.8m for the supply of robotic sets to the MoE and the delayed order of reprint textbooks in 4QFY16 which flowed into 1QFY17 in the preceding year. However, the lower operating expenses were a result of management’s better-cost control cushioned the fall in revenue (EBIT margin improved by 1.6ppt to 26%).

New acquisition. Sasbadi also announced that it has entered into a share acquisition agreement (SAA) with the owners of Pinko Creative Sdn Bhd to acquire 100% of Pinko Creative for a consideration of RM860k. The purpose of this acquisition is to increase Sasbadi’s market presence in the Chinese comic book publishing segment. At the given consideration, Pinko Creative is valued at an attractively low PE of 2.9x. However, we take a negative bias stance on this acquisition, as we opine that sales of printed books will be negatively affected by the digital disruption.

Forecast. We revise our FY18-20 earnings assumption upwards by 7-9% to RM15.2m, RM17.0m, and RM18.8m respectively, as we adjust for lower operating cost.

Maintain BUY, higher TP: RM0.50 (previously RM0.47). Based on an unchanged 12x P/E (mean) tagged to CY19 earnings.

Source: Hong Leong Investment Bank Research - 18 Apr 2018