Period     1Q13

Actual vs.  Expectations    The 1Q13 net profit of RM1.0m was way below expectations and only accounted for 1.3% and 1.1% of ours and the street’s full-year estimates respectively. The main culprits were: 1) the higher number of nursing graduating students, 2) the slow application process on Student Pass for foreign students due to new rules and 3 the higher academic staff cost of RM19.9m (+11.1% YoY). 

Dividends    The company declared an interim single tier dividend of 5.0 sen, which was paid on 25 April 2013.

Key Result Highlights     YoY, the 1Q13 revenue of RM55.8m was down by 28% due to the dismal number of foreign students intake coupled with a higher number of graduating students from its nursing programme, which brought down its students base by 7% to 26k according to management. The group’s net profit further plunged by 95% to merely RM1.0m (FY12: RM21.9m) due mainly to: 1) the escalating academic staff costs by 11.1% to RM19.9m as a result of faculty expansions and 2) lower other income contribution from hostel rent given the higher number of graduating students. Margin-wise, a slump in revenue couples with the higher academic staff costs caused the GP margin & NP margin to fall to 64.3% and 1.8% respectively (FY12: 76.9% and 28.1% respectively).

QoQ, the revenue rose by 6% to RM55.8m as a result of  a higher local students intake. Nonetheless, the single-digit revenue growth was not enough to cover most of its costs (i.e. personnel, administrative, etc.), which are fixed in nature and thus this dragged down the net profit by 61% to a scant RM1.0m (4Q12: RM2.5m). The NP margin was also dragged lower to 1.8% from 4.8% in 4Q12.

Notably, management also said that the slow application process on Student Passes for the foreign students was due to the latest rule set by MOHE, which required that Student Pass applications be handled via its sole appointed agency - Education Malaysia Global Services S/B (EMGS).

Outlook    The outlook is now cautious ahead as we believe that the group is still struggling to recover from the loss  of a large number of its graduating students, which was supposed to be filled by new recruitments of foreign students but  has been dragged by the new regulation set by the government. Going forward, the escalating competition in the private  higher education space will provide an additional challenge to the group in our view.

Forecasts    Post-results, we have slashed our FY13E-FY14E net profit forecasts by 43.5% and 38.5% to RM42.2m and RM49.3m respectively after taking into account (1) our lower student base assumption of 26k and 27k (from 29k and 32k previously) in FY13E-FY14Em, respectively, (2) our  lower GP margin assumption of 70.5% and 71.0% (from 75.0% and 75.5% previously) in FY13E-FY14E, respectively, after accounting for its dwindling top line growth coupled with its high level of fixed costs such as academic staff costs and operating costs going forward.

Rating  Downgrade to UNDERPERFORM

Valuation     We have lowered SEG’s TP to RM1.45 (from RM1.75 previously) based on an unchanged Forward PER level of 21.0x (vs. 16.3x previously) over a lower FY14E EPS of 6.9 sen (vs. 11.0 sen previously) after rolling forward our valuation base year to FY14.

Risks    A reduction in its student enrolments.

Source: Kenanga