We walked away feeling neutral post meeting with Sasbadi’s management. The group still concentrates on print segment as core strength despite rapid growth in non-print segment. Sasbadi is active in participating in book fairs to clear out inventories. Maintain our earnings forecast but with lower TP of RM0.18 based on 10x P/E of CY20 earnings.

We met with Sasbadi recently, and came back feeling neutral on the group’s near and medium term outlooks. Below are the key takeaways.

To accelerate non-print contribution. The contribution of non-print segment has grown in the last 3 years from the shift of its business focus due to its highly cyclical business that hampered earnings delivery. Its non-print segment consists of (i) digital & network marketing; and (ii) ALP & STEM Education. Under the digital & network marketing, Sasbadi ventured into the business after securing the right from Ministry of Domestic Trade to promote i-learn Ace products. While for ALP & STEM, Sasbadi is a distributor of education Lego blocks to school and organiser of robot competitions.

Future of print segment. Sasbadi still treats the print segment as their bread and butter operation given their core strength, though the print business is highly cyclical due to the timing of textbook delivery. YTD textbook contracts secured is significantly lower at RM1.57m (1H18: RM8.37m), namely RM746k for arts education Year 4 and RM826k for Chinese Language Year 4. We understand that there is no slowdown in disbursement of government contracts, implying that Sasbadi has been losing out to other publishers. All is not lost as we understand that Sasbadi is tightening is operations to secure more textbook awards from Ministry of Education.

Digital contribution to accelerate. Despite early optimism on the back of higher number of agents, 1HFY19 MLM segment revenue fell 38% YoY to only RM2.5m. The setback was mainly weighed by loss of major distributors and coupled with the delay in replacing the key leadership personnel. We understand that the key leader who left previously now has re-joined the team. We can expect the sales to be revived on back of this.

To clear out inventory. Sasbadi is active and committed to reducing its inventory level that stood at RM73m as end of 2QFY19. Sasbadi is currently leveraging on the Big Bad Wolf book fair which is held on a monthly basis and the locations now involve more rural areas. Rural areas serve as an important market for Sasbadi especially for the school workbooks and we understand that Sasbadi is willing to sell at cost to clear inventories during this event.

Forecast. Post meeting, we left our earnings forecast unchanged despite 1HFY19 results have accounting for 90% of our full year estimate. We feel that 2H earnings delivery will be a drag due to (i) seasonally weak print segment; (ii) digital & network marketing needs more time to calibrate despite pickup of interest of i-Learn Ace; and (iii) possible inventories provision due to change in accounting treatment. As such, we feel it would be prudent to retain the conservative tilt to our projections.

Maintain HOLD but with lower TP of RM0.18. We believe Sasbadi’s efforts (to grow non-print revenue segment and cost cutting measures) are slowly starting to show positive results, however, the slowing print segment continues to remain its bread and butter. We roll our valuation into CY20 but tag to a lower PE multiple of 10x (from 12x), reflecting the prolonged time frame for print segment to recover.

Source: Hong Leong Investment Bank Research - 12 Jun 2019