We are keeping our UNDERWEIGHT call on the education sector due to: (i) lack of near-term re-rating catalysts and (ii) muted impact from the recently launched Malaysia Education Blueprint (MEB) 2013-2025, as the policy is focused on improving education quality at the primary and secondary school level. Meanwhile, we believe the upcoming GST implementation will have a muted impact on the sector, which falls under essential services. While the GST implementation may likely contribute to the rising living-cost environment (thus hampering international school enrolment going forward), HELP is likely to benefit at the expense of its rivals given the it is one of the more affordable international school institutions in the country. We continue to favour HELP over SEG for the former’s clean balancesheet as well as its early foray into the lucrative private international school niche (scheduled to commence classes by Jan-14). We are reiterating our MARKET PERFORM rating on HELP with an unchanged target price of RM1.88 based on targeted FY14 PER of 16.1x. Similarly, there is also no change to our UNDERPERFORM call on SEG as well as the target price of RM1.08, which is based on a targeted FY14 PER of 24.0x.

Minimal impact of Malaysia Education Blueprint on HELP and SEG. The government recently introduced the 2013-2025 Malaysia Education Blueprint (MEB) in hope to bring a major improvement in the country’s education system. The main objective of the long-term MEB were: i) understanding the current performance and challenges of Malaysia’s education system; ii) establishing a clear vision for the education system as a whole over the next 13 years; and iii) outlining a comprehensive transformation programme for the system, including key changes to the Ministry. However, we believe the impact are minimal for HELP and SEG in the short and medium term as the policy is mainly focus on raising the education quality for both teachers and students in the primary and secondary level.

SEG & HELP unaffected by potential GST implementation in the near term. In principle, GST (Goods and Services Tax) is imposed on all goods and services produced in the country including imports. However, in order not to burden the lower income group, certain basic foodstuff (e.g. rice, sugar, flour) and essential services such as private education are not subject to GST, according to Royal Malaysian Customs Department. Hence, we believe that the potential GST implementation may only have a muted impact on the education industry and hence stocks under our coverage such as HELP and SEG. Nonetheless, in the long-term, we believe the education sector may potentially undergoes a challenging period as the drastic rising public cost of living post-GST may somewhat indirectly influence the market to look for cheaper education options such as distance learning programmes.

Education sector preview for 2014 Budget. Similar to last year, we believe the government will continue to focus on strengthening education and human capital development in the upcoming 2014 budget, in line with the official launch of Malaysia Education Blueprint 2013-2025 (MEB) by the Ministry of Education (MoE) recently. We believe PRESBHD (Not Rated) may be the potential beneficiary from the budget among the education stocks as we understand its management is studying the possibility of providing training for all teachers across the country to integrate English and IT in the classrooms, which is in line with the MEB strategy to enhance English language teachers in the country.

Good start for HELP International School (HIS). HELP indicated that they have received 350 applications for the first batch for its international school, which is scheduled to commence classes in Jan-14. As the number of students came in above our earlier conservative assumption of 250 students, there is a possibility for an upwards revision to our current FY14 HIS’ earnings forecast of RM10.6m (including registration fees). Meanwhile, should the GST implementation be effective from CY15 onwards, there could be a potential impact to the international school enrolment in view of the rising living-cost environment. Nevertheless, HELP, being one of the more affordable international school institutes in the country, could potentially benefit at the expense of rivals which charges much higher tuition fees and related-costs. Hence, we are maintaining our MARKET PERFORM call on HELP (TP:RM1.88).

Source: Kenanga