We believe SEG could enjoy a boost in CY14 from the recent liberalisation in the Education Malaysia Global Services (EMGS) ruling, which may results in higher foreign students intake. In fact, the group’s total student base has started to recover, at 24k end-CY13, higher than our earlier 22.4k estimate and thus, prompting us to raise our students’ base assumption. SEG has also started to penetrate online programs segment in late-CY13, which we believe could further expand its margin due to the lower operating cost structure. Meanwhile, there is no solid progress on its international school segment, and we understand that SEG is open to M&As to enhance shareholders’ value. All in, we have raised our FY13, FY14 and FY15 net profits estimates to RM27.5m, RM35.9m and RM40.5m, respectively, after raising our student's base assumption. Correspondently, our SEG target price is also raised to RM1.17 (from RM1.08 previously) based on targeted FY15 PER of 22.0x, in line with its peer HELP International’s privatization targeted forward PER of 21.7x. Despite having a higher target price, our UNDERPERFORM call on SEG remains unchanged due to its current rich valuation.

Recent liberalisation of EMGS ruling may lure more students. SEG is seeing signs of recovery following the recent liberalisation of EMSG ruling in late CY13, which allowed new foreign students to receive all the necessary government approvals within days under the newly introduced “Green Lane” policy. Note that the new ‘green lane’ policy is only applicable to education players who had achieved tier-5 rating and above under the Rating System for Malaysian Higher-Education Institutions (Setara). The latest EMGS ruling has immediately received a positive response from the foreign students' community, according to the management, thus suggesting more foreign students’ intake going forward. These positive developments have led us to raise our SEG’s number of student base assumption in FY13-FY15 to 24.3k, 26.2k and 28.0k, respectively, from 22.4k, 24.0k and 26.0k previously.

Introduced a high-margin online program. SEG has introduced a new Professional And Continuing Education (PACE) program during end-CY13 to provide Masters in Business Administration courses. The online program fee is c.20%-30% lower than the traditional programs, with minimal operational costs involved. We understand that the targeted market is for the working class group given that the program not only requires cheaper tuition fees but also provides flexibility to the students. We understand that the group is targeting to launch 7 more online programs in FY14. Meanwhile, SEG also indicated that the Early Childcare Program will be one of its key focuses in FY14 given the implementation of a new ruling by the Ministry of Education, who requires preschool teachers to have at least a minimum diploma qualification. We believe that this new ruling would likely prompt an influx of applicants for the Program in order to meet the stringent requirements.

No concrete progress on International School, yet. While SEG continues to believe its upcoming international school segment could provide a new revenue stream to the group, there is no solid development at this juncture and the group is still exploring the best operating structure. Note that the group acquired a 12-acre development land in Setia Alam for RM52.3m in CY12 with an aim to construct a full-fledged international school with capacity for c.3,500 students. We understand that management has earlier targeted to complete the international school by Sept. 2015. Nevertheless, judging from the current slow progress, we do not discount that the campus may potentially take longer to complete.

M&A possibilities still open. SEG is still looking at possibility of mergers and acquisitions if the right candidate does come forward, as they continue to seek growth opportunities and enhance shareholders’ value. However, it is believed that there would be no immediate privatization plan in the pipe-line as the group’s largest shareholder, Navis Capital Partners Ltd, had failed to privatize the company at RM1.14b (or RM1.214 per share) in early CY12 as a result of low acceptance from shareholders.

Source: Kenanga