Sasbadi reported 1QFY20 core earnings of RM4.7m (>100% QoQ, -12% YoY) accounting for 73% and 70% of HLIB and consensus full year estimates. After accounting for seasonality, we deem this below expectations. We foresee a challenging outlook for Sasbadi to persist due to the weak retail sales market along with the prolonged ban for Standard 1 to 3 workbooks. In addition, we feel that the contribution from non-academic segment is still slow and unable to mitigate the falling contribution from the print segment. We are ceasing coverage of Sasbadi given the lack of near term upside catalysts and reallocation of our internal resources. Our previous forecast, SELL recommendation and TP of RM0.155 should no longer serve as a reference going forward.

Below expectations. Sasbadi’s 1QFY20 revenue came in at RM27.7m (-9% YoY, +83% QoQ), trickling to core earnings of RM4.7m (>100% QoQ, -12% YoY). Traditionally, 1Q (Sept-Nov) tends to be the strongest quarter for Sasbadi as textbook deliveries takes place before schools commence a new term in Jan. Still, with 1Q at 70% of our full year estimates (consensus: 73%), we deem this to be below expectations. Subsequent quarters (i.e. 2Q-4Q) will be seasonally much weaker and run the risk of potential inventory write downs which may result to quarterly losses. Putting things into perspective, 1Q accounted for 84% of full year earnings in FY19. No dividend was declared.

QoQ. Revenue increased by 83% to RM27.7m given a seasonally strong 1Q as explained earlier. Core earnings increased to RM4.7m vs. loss of -RM3m due to the better academic book sales and supply of textbook to schools. This was also aided by Sasbadi’s continuous efforts in optimising operational efficiency.

YoY. 1QFY20 revenue fell -9% on the back of lower contributions from all segments namely digital (-30.3%), ALP and STEM education (-17.9%) and print segment (- 7.7%). Despite higher academic book sales, print segment was weighed by lower textbook contracts which were significantly lower against last year. In turn, core earnings dropped -12% to RM4.7m due to the reasons mentioned above, but partially offset by lower operating expenses by -7%.

Outlook. We foresee the challenging outlook for Sasbadi to persist due to the weak retail sales market along with the prolonged ban for Standard 1 to 3 students workbook enforced within school compounds by the MoE. In addition, Sasbadi’s textbook contract secured is significantly lower than the previous years. We also feel that the contribution from non-academic is still slow and unable to mitigate the falling contribution from the print segment. Due to these factors, we believe it will remain challenging for Sasbadi going forward.

Cease coverage. We are ceasing coverage on Sasbadi due to a lack of near term upside catalysts and reallocation of our internal resources. Our previous forecast, SELL recommendation and TP of RM0.155 (based on 10x PE multiple tagged to CY20 EPS) should no longer serve as a reference going forward.

Source: Hong Leong Investment Bank Research - 22 Jan 2020