Sasbadi reported 9MFY19 core earnings of RM8.3m (-19.4% YoY) which was below expectations. The lower earnings YoY and QoQ were weighed by slower print segment contribution. Sasbadi’s earnings outlook remains muted due to the heavy dependency on the print segment and various challenges in the sector that are here to stay. Cut earnings forecast and downgrade to SELL. TP of RM0.17 based on 10x P/E multiple tagged to CY20 earnings.

Results below. Sasbadi’s 9MFY19 revenue of RM72.6m translated into core earnings of RM8.3m, accounting for 100% and 95% of HLIB and consensus full year forecasts, respectively. We deem the results to be below as we foresee 4Q core earnings to be hit by inventory write down activity, potentially resulting to a quarterly loss. Management too alluded on this inventory write down possibility which usually takes place in 4Q (-RM4m in 4QFY18) as Sasbadi adjusts its book for the year end before tendering/printing new textbook orders.

QoQ. Coming from a seasonally stronger 2Q, revenue weakened by 27% which resulted in a 64% drop in core earnings. The culprit was the 11.9% lower earnings from print segment reflecting the slower textbook delivery as compared to the beginning of the school semester.

YoY. 3QFY19 revenue decreased by 6.8% and core earnings declined by 1.3%. Both revenue and core earnings were weighed by print segment revenue (-6.3%), impacted by workbook related ban by Ministry of Education for standard one, two and three students. On the other hand, ALP & STEM segment posted better revenue by RM80k due to the initiative to ramp up Lego sales.

YTD. Although 9MFY19 revenue only decreased 3.2%, core earnings dropped 19.4% to RM8.3m. Earnings were partly cushioned by lower expenses by 5%, chiefly from lower distribution cost by 11%.

Outlook. Sasbadi’s earnings outlook remains muted due to the heavy dependency on the print segment and various challenges in the sector that are here to stay. Nevertheless, we take some comfort on its efforts to (i) optimise cost and (ii) growing non-print segment contribution as this serves to reduce the cyclical impact.

Forecast. We revise our FY19 core earnings lower by 9% (in view of expected 4Q losses as elaborated earlier), but we maintain our FY20 core earnings forecast.

Downgrade to SELL with lower TP of RM0.17 tagged to CY20 earnings. Our earnings reduction is partially cushioned from the rolling forward of valuation horizon to CY20 (from CY19). All in, our TP (still pegged to 10x) is reduced slightly from RM0.18 to RM0.17. Downgrade to sell given (i) potential loss in the next quarter and (ii) efforts to grow its non-print business is still unable to cushion the falling revenue from the print segment.

Source: Hong Leong Investment Bank Research - 24 Jul 2019