Period     2Q13/1H13

Actual vs.  Expectations  On the surface, the 1H13 net profit of RM17.5m is within expectations, accounting for 59.9% and 43.7% of our and consensus full-year estimates respectively. However, it is a different story excluding a one-off land disposal gain of RM15.8m, where the normalised 1H13 net profit plunge below expectations, accounting for 3.2% and 2.4% of our and the full-year estimates respectively. The main culprits were: (i) the higher number of graduating nursing students leaving its hostels causing rental revenue to drop and; (ii) the delay in arrival of international students due to new regulations. 

Dividends    No dividend was announced during the quarter as expected.

Key Result Highlights  YoY, 1H13 revenue of RM113.7m declined 28% due to the dismal number of foreign students intake coupled with a higher number of graduating students from its nursing programme. Stripping-off the one-off RM15.8m gain from the disposal of a piece of land at Kota Damansara, the  group’s core net profit plunged to merely RM2.7m (-94% YoY) due mainly to: (i) the lower other income contribution of RM5.49m (1H12:RM8.59m) from hostel rental given the higher number of graduating students. Margin-wise, a slump in revenue coupled with the lower other income from hostel rental caused the GP margin & NP margin decrease to 64.7% and 2.4% respectively (FY12: 75.7% and 26.6% respectively).

QoQ, the revenue rose by 4% to RM57.9m boosted by higher local student intake. In addition to the one-off gain from land disposal of RM15.8m in 2Q13, the group’s net profit increased to RM17.5m compared to RM1.0m in 1Q13.  However, stripping-off the land disposal gain, the group only managed to achieve RM1.7m core net profit in 2Q13 despite the slightly higher group’s GP margin of 65.1% (1Q13: 64.3%).

Outlook    Outlook remains cautious. We are taking a more cautious view on SEG due to intensifying competitions and regulatory issues in the sector. Despite management recently highlighted that the delay in foreign students’ arrival is being alleviated gradually since the Education Malaysia Global Services S/B (EMGS) has shortened the time taken to process visas for foreign students, we believe the implementation may need some time to translate into positive impact.

Forecasts    Post-results, we have slashed our FY13E-FY14E net profit forecasts by 44.7% and 18.9% to RM17.1m and RM32.1m respectively after taking into account: (i) our lower student base assumption of 23.0k and 24.0k (from 24k and 25k previously) in FY13E-FY14E respectively; and (ii) our lower SEG’s GP margin assumption of 64.5% and 67.0% (from 69.0% and 70.5% 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  Maintain UNDERPERFORM  as the group is still lack of positive catalyst.

Valuation     We have lowered SEG’s TP to RM1.08 (from RM1.33 previously) in conjunction with the revision of earnings estimates. This is based on an unchanged Fwd. PER of 24.0x on a lower FY14E EPS of 4.5 sen (vs. 5.5 sen previously). 

Risks    A reduction in its student enrolments.

Source: Kenanga