Sasbadi’s FY18 core earnings of RM8.0m (-10.7% YoY) were below ours and consensus expectation. 4QFY18 performance was affected by lower book sales and higher paper cost. We cut our FY19-20 earnings assumption by 48-58% respectively as we adjust for lower book sales and higher paper cost. We maintain HOLD rating with a lower TP of RM0.20 based on an unchanged 12x P/E multiple tagged to CY19 earnings.

Below expectations: Sasbadi’s FY18 revenue of RM87.8m (-5.6%) translated into core earnings of RM8.0m (-10.7% YoY), accounting for 62% and 66% of HLIB and consensus full year estimates. The results disappointment was due to lower-than expected revenue and higher-than-expected operating expenses.

QoQ: New revenue stream (distribution of Marshall Cavendish to private and international school) failed to cushion the drop in revenue on conventional workbook causing 4QFY18 revenue to plunge by 33.1%. The group recorded a core loss of RM2.3m, as the lower revenue was further pressured by higher paper cost.

YoY: 4QFY18 revenue remained rather flat (-1.6%), dragged by slower up-take of i Learn Ace (MLM business). Core losses narrowed to RM2.3m from RM4.2m in FY17, this is due to better cost management.

YTD: Revenue declined by 5.6% but earnings fell by a steeper magnitude of 10.7% due to higher paper cost.

Forecast. We revise our FY19-20 earnings assumption downwards by 48-58% to RM7.2m, and RM6.5m respectively, as we adjust for lower book sales and higher paper cost.

Headwinds ahead. The Ministry of Education (MoE) recently announced that, secondary schools will turn digital with the introduction of e-textbooks next year. If this rolls out according to plan, it will be negative for Sasbadi as it still depends heavily on book sales (89% of revenue). Nonetheless, this decline could be partially offset by the sale of its IP (potentially higher margin vs books) to the MoE. However, at this point we are still uncertain if the available infrastructure allows for such a major change, as there are still schools without internet connection.

Maintain HOLD with a lower TP: RM0.20. Despite the results shortfall we maintain our HOLD rating with lower TP of RM0.20 (previously RM0.42). Our TP is based on an unchanged 12x P/E (mean) tagged to CY19 earnings. Despite the drastic drop in TP from RM0.42 to RM0.20, our HOLD call is maintained given the steep share price decline of 41% from (RM0.39 to RM0.23) since our last published report in July, 2018. Moving forward, with the weaker market sentiment, couple with rising cost environment we opine that it will only get harder from this point.

Source: Hong Leong Investment Bank Research - 1 Nov 2018