We are NEUTRAL on the local education sector. Despite escalating competition in the private higher education (HEI) space fueled by the growing number of players at the university level, the sector’s defensive nature and its upcoming lucrative international school segment will still provide investors with a much-needed shelter in the current period of uncertainty. We have fine-tuned our HELP’s PER valuation time frame to that of a 2-year (from a 4-year previously) to better reflect the group’s current operational environment. There are, however, no changes in our earnings estimate and MARKET PERFORM rating for HELP. Nonetheless, we have raised our HELP target price to RM2.00 (from RM1.85 previously) after assigning it a higher targeted FY13 PER of 17.2x (from 15.9x previously) to align its valuation with our revised valuation time frame. Meanwhile, we are reiterating our MARKET PERFORM call on SEG with an unchanged target price of RM1.75, based on a targeted FY13 PER of 16.3x. We continue to favour HELP over SEG in the education sector since the former could see further upside from its: 1) potentially higher than expected international school student intakes in FY13E-FY14E with management expecting an intake of 400 to 500 students for each of the two years as compared to our conservative assumption of 200 to 300 students per each intake and 2) a possible tuition fees hike in FY13E-FY14E, which we have yet to impute into our forecasts.

Intensifying competition in the private HEI space. The Ministry of Higher Education (“MOHE”) has upgraded a total of six private colleges to private university status since March 2012. With the increasing number of industry players offering similar programmes, we believe that competitions in the sector will continue to intensify thus leading to a potential margin compression going forward. On top of that, the recent policy tightening measures taken by the MOHE to impose a two-year moratorium on the issuance of new licenses to potential private higher education institutions (HEIs) suggested that there is a potential oversupply of HEIs in this segment.

Foray into the lucrative International School segment. On a national scale, there are currently 71 international schools in the country with 27k students in total, of which 42% are locals. This is an astounding >100% increase over the last five years thanks to: 1) the increasing number of mid-to-upper income households in the country and 2) the liberalisation of entry for Malaysian students into international schools. According to their managements, HELP and SEG are targeting to commence their international school segment by Sept-13 and Dec-14 respectively. We understand that HELP is charging an average of RM28k/student per year, to be settled in three instalments.

Tuition fees hike in the cards? Our recent visit to SEG found that the group has an intention to raise its tuition fees by 10%-15% for most of its programmes to new students in CY13. While the actual implementation time frame remained vague at this juncture, we estimate that SEG’s FY13 earnings forecast could potentially be enhanced by 4.4% to RM78.0m should we factor in a net addition of 1.8k new students and an average 10% hike in the tuition fees from Apr-CY13 in our model. Meanwhile, based on HELP’s historical tuition fee trend, we also do not discount the fact that the group could potentially follow suit to hike its tuition fee as well although its management has yet to show any such intention at this juncture. For illustration purposes, we estimate that HELP’s FY13 net profit could potentially rise by an additional 2.8% to RM17.0m should we assume a net addition of 700 new students and an average tuition fees hike of 10% from Apr-CY13. An annual fee increase is actually expected based on the industry’s usual practice. However, we have yet to factor in the above potential tuition fees hike into our SEG’s and HELP’s forecasts.

Reducing our HELP’s PER band valuation time frame to 2 year. We believe that HELP has moved into a new era after 2011 when the group was granted a University status then and of late, an international school license. On top of that, the group has also introduced its home-grown programmes since 2 years ago, which generally garner a higher gross profit margin (20%-30%, depending on the subject offered) as compared to its traditional twining and A-Level programmes (>20%). We understand that the group provided a total of 21 home-grown programmes in FY12. In view of the abovementioned transformation in HELP, we believe that a 2-year PER valuation time frame will better reflect the group’s current business environment instead of the earlier 4-year time frame. Meanwhile, there is no change in our 3-year PER valuation time frame for SEG, as we believe the group has started its expansion space since year 2010 following the roll-out of new and high-margin niche programmes.

Source: Kenanga