Masterskill's  FY11net profit of RM38.1m was  way  below consensus and our forecasts,  only making up 82.0% of  both full-year estimates. The company sank intothe red in 4QFY11 as enrolment  weakenedand  operating and depreciation expenseswent up. We cut our FY12 earnings estimate further by 2.8% as we turn increasinglycautious on potentially weaker enrolment growth on stiff competition.

Maintain SELL.Our FV is now RM0.84, based 7x FY12 PER. A big letdown. Masterskill's FY11revenue of RM250.2m was 20.8% lower y-o-y due to weaker student intake  resulting from tightening of the minimumentry requirements for diploma in nursing programs from 3 to 5 credits, as wellas the cap on loans to nursing students imposed by National Higher EducationFund (PTPTN) from RM60k to RM45k. Correspondingly, EBIT sank by an even larger63.8% y-o-y to RM41.7m as depreciation charges spiked up in tandem with itscapex rollout. The FY11 core earnings dived 62.0% to RM38.1m, helped only by alower effective tax rate during the year. The 4QFY11 numbers contracted sharply q-o-q and y-o-y,  with EBIT andcore earnings sinking into the red for the first time since the company'slisting in mid-2010, with losses of RM2.9m and RM1.6m respectively. Weattribute the dismal performance to the anaemic student growth as PTPTN isrumored to be cutting its loan allocation for nursing programmes in light ofthe widely reported oversupply of nurses.

Dividend the soleconsolation. Despite the subpar quarterly performance,  the company declared a second interim DPS of1.4 sen, bringing its FY11 DPS to 5.6 sen. This implies a payout ratio of60.2%, for a decent 5.4% yield. Dearth of catalysts. The poor results vindicateour earlier concerns that Masterskill may be cracking under the weight of rising competition  and increasingly stringent PTPTN requirements.Given the dearth of re-rating catalysts for now, we continue to  see a difficult  1HFY12 due to subpar new sign-ups. Although its proposed collaboration with RMIT, Australiahas secured Ministry of Higher Education approval, we remain skeptical on thenear term accretion to earnings given the company's poor execution record.

SELL. We arerevisiting our model and cutting our FY12 student growth further by 1.2% afterour last downgrade in Nov 2011. With our FY12 EPS now at 12.0 sen (-2.8% from 12.6sen previously), we take this opportunity to introduce our FY13 forecasts. Allin, our bearish stance on the counter stays. Hence, we maintain SELL, at a revised FV of RM0.84, based on a lowerFY12 PER of 7x (from 8x previously), considering  that Masterskill's  worst ever quarterly performance since  going public will spook investors. We will take a re-look at our assumptionsshould its venture into non-healthcare courses in partnership with RMIT bearsfruit.

Source: OSK188