Following a disappointing FY11 during which Masterskill's earnings dived 62.7% y-o-y and the release of its 2011 Annual Report, we did an on-the-ground check on its operations in 1QFY12. We are maintaining our cautious stance given a potential earnings letdown in FY12 as its student base shrinks and its share price softens further on weakening fundamentals. With the company yet to turn around anytime soon, we maintain our SELL, at a revised FV of RM0.81, based on 0.7x FY12 P/NTA.
Likely to hit new lows. Masterskill's student base shrank 22.7% y-o-y from 18k in FY10 to 14k in FY11 due to two negative regulations relating to its diploma in nursing program during the year. These were a reduction in PTPTN's loan allocation from RM60k previously to RM45k, and the increase in minimum entry requirements from 3 SPM credits to 5 credits. As a result, the company's FY11 earnings plunged 62.7% y-o-y to a record low of RM38.1m since its listing in mid-2010. With its 1QFY12 results due to be released on 28 May, we did some on-the-ground checks on Masterskill's core operations and came to the conclusion that its numbers are likely to be significantly weaker in 1H12, owing to the absence of a major enrolment during this period. We expect the group to report core losses of RM3m-RM5m for 1QFY12, and break even at best in 2QFY12. As the next major enrolment would only be in July and Sept, its share price is likely to retrace further in tandem with its dwindling earnings.
Slashing forecasts. We are revisiting our model to lower our core assumptions as well as retrospectively update the FY11 numbers following the release of the company's 2011 Annual Report. We are now modeling for zero growth in its student base for FY12 and a sub-par 5.0% growth for FY13, as well as slashing our core earnings forecasts by 90.9% for FY12 and 89.6% for FY13 to RM4.5m and RM5.4m respectively. While there is press speculation that the company may pay a bumper dividend, we believe such as move is unlikely, at least until management revives its core operations.
SELL. After changing our valuation from a FY12 PER of 7x previously to a more conservative P/NTA to reflect the possible earnings disappointment, we derive a lowerFV of RM0.81, based on 0.7x FY12 P/NTA. Recall that the company was only listed in mid-2010 and that its earnings have been on a downtrend since then. Valuation-wise, Masterskill's historical P/NTA ranges from 0.87x to 3.64x, and in view of the likelihood of it posting a record-low FY12, we are attaching a 20% discount to its lowest historical valuation. Given the absence of re-rating catalysts in the near term and the potential downside, we are maintaining our SELL call, at a revised FV of RM0.81, versus RM0.84 previously. As recent news of the potential entry of Ekuinas may not suffice in propping up the share price at current levels, we advise investors to take profit.