Period  1Q14/FY14

Actual vs. Expectations The reported 1Q14 net profit of RM7.2m (-14.5% QoQ; +619.3% YoY) came in below expectation and accounted for 18.9% of our and 18.3% of the street fullyear estimate. On our side, the key culprits were mainly due to lower revenue recognition as a result of timing differentiation on students’ intake and higher than expected operating costs. Note that SEG’s 1Q NP generally accounted for 25%-36% of the full-year earnings, based on the past three-year financial performance, except 1Q13 that merely accounted for about 3% as a result of the higher number of graduating students and negative impact from the new EMGS ruling.

Dividends  No dividend was declared during the quarter as expected.

Key Results Highlights YoY, SEG registered a +10.2% YoY jump in its revenue to RM61.5m while its net profit surged by 619.3% to RM7.1m. The strong improvement was mainly led by better student enrolments and low base effect. Note that, the weak financial performance in 1Q13 was mainly due to the dismal number of foreign students from its nursing programme and high number of graduating students from the Group’s nursing programme.

 On a QoQ basis, 1Q14 PBT rose by 54.0% (4Q13:RM5.2m), thanks to the higher margin from newly introduced online programmes and cost efficiency from consolidation of local operations. Despite recorded higher PBT, the group’s net profit lowered by 15% to RM7.1m, no thanks to the higher tax expenses recorded in the current quarter.

Outlook  The group’s outlook appears promising as we believe SEGI has been liberalised from the EMGS ruling which had hampered the Group’s effort to bring in foreign students. We believe SEGI’s business would be back to normal from FY14 onwards.

 We understand that SEGI intends to add more higher margin programmes to its portfolio in FY14, particularly increasing the number of its online programs. Besides, the Group had already consolidated its less-profitable operations to improve its cost efficiency to provide sustainable growth moving forward.

Change to Forecasts We have lowered our FY14 net profit to RM34.5m (-10.5%), after imputing higher operating costs assumption. Our FY15 earnings estimate, however, remains unchanged.

Rating Maintain UNDERPERFORM

The low base effect could lead the group to record a strong earning's jump; however, its capital upside could be limited due to the current rich valuation.

Valuation  We maintained our SEG TP at RM1.29 based on unchanged targeted FY15 PER of 22.0x. This in line with its peer HELP International’s privatization targeted forward PER of 21.7x.

Risks to Our Call Better-than-expected student enrolment.

 Higher operation cost implied.

Source: Kenanga