Period  3Q13/9M13

Actual vs. Expectations  The 9M13 core net profit of RM8.8m is below expectations and merely accounted for 51.5% and 24.6% of our and the street’s full-year estimates after stripping-off the one-off gain from disposal of land of RM15.8m in 2Q13. The main culprits were: (i) the higher number of nursing graduating students on the final batch, (ii) the delay in the arrival of international students due to establishment of new regulations, and (iii) lower hostel rental income due to higher number of graduating students.

Dividends  No dividend was announced during the quarter as expected.

Key Result Highlights  YoY, 9M13 revenue of RM174.9m declined 25% due to the dismal number of foreign students intake coupled with a higher number of final batch 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 RM8.8m (-85% YoY) due mainly to: (i) lower other income contribution of RM7.9m (9M12:RM12.6m) from hostel rental given the higher number of graduating students and (ii) dwindling topline due mainly to the establishment of new regulation that caused delay in arrival of international students. As a result, the GP margin and core NP margin decreased to 67.1% and 5.0% respectively (FY12: 75.2% and 24.9% respectively).

 QoQ, the revenue rose by 6% to RM61.2m boosted by higher local student’s intake as well as slim improvement in foreign students’ enrolment in the 3Q, which usually is the group’s strongest intake in a calendar year. As a result, the group’s core net profit increased to RM6.2m as opposed to RM1.7m in 2Q13. Hence, the group’s GP margin nudges up slightly to 71.4% (2Q13: 65.1%).

Outlook  We are still cautious on SEG in the short-to-medium term given the intensifying competitions, regulations hiccup, and lack of significant positive catalyst in the sector. Although 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 a 1-2 quarters to translate into positive financial impact. However, once the issue is cleared, we believe SEG will be benefited from the new regulation with the influx of foreign students to replace its high number of nursing graduating students.

Forecasts   Post-results, we have slashed our FY13E core net profit forecasts by 39.8% to RM10.3m after taking into account: (i) lower student base assumption of 22.4k (from 23.0k) in FY13E due to estimated seasonally weaker 4Q, and (ii) lower hostel rental income of RM13.0m (from RM18.0m previously) in FY13 based on conservative view on higher nursing graduating students. Our FY14E earnings remain unchanged.  

Rating   Maintain UNDERPERFORM

Valuation  Although we are cutting SEG’s FY13 earnings, our FY14 TP remains at RM1.08 based on an unchanged Fwd. PER level of 24.0x and unchanged FY14 EPS of 4.5sen.

Risks to Our Call  Improvement in its student enrolments. 

Source: Kenanga