Period  4Q14/FY14

Actual vs. Expectations  SEG’s FY14 core Net Profit (NP) of RM23.4m (+36.0% YoY) came in below expectation and accounted for 94% of our full-year estimate.

 The key negative deviation was mainly due to: (i) lowerthan- expected student intake, and (ii) higher-thanexpected administrative expenses and fixed cost.

Dividends  Above expectation. A 2nd interim dividend of 6.0 sen was declared, bringing its full-year DPS to 11.0 sen (vs 7.5 sen in FY13) which implied a payout ratio of c.323.5%.

Key Results Highlights  YoY, the FY14 turnover improved marginally by 2.2% to RM242.1m (vs RM236.9m in FY13), mainly due to: (i) higher foreign student intake in FY14 (Group experienced slowdown in international students intake in FY13 as a result of the new visa ruling implementation). Meanwhile, Group’s core EBIT level rose by 48.3% to RM26.6m (after stripping-off a one-off RM15.8m gain from the disposal of land at Kota Damansara in 9M13), mainly driven by lower distribution cost (where the group were more aggressive in advertising to recoup its higher number of graduating nursing students in FY13).

 QoQ, SEG’s revenue was marginally lower by 1.7% to RM58.9m as the 3Q traditionally has a stronger intake compared to 4Q. EBIT, meanwhile, declined to RM3.8m (-37%) due to the higher rental cost for its hostel. The lower EBIT coupled with tax rebate from foreign student revenue led the group’s NP to stay flat at RM4.7m (3Q14: RM4.7m)

Outlook  The group is expecting to attract more students in FY15 through its marketing initiatives via partnering with overseas education agencies. Besides, SEG is looking to expand its courses offered via its online program (PACE program), which attracts higher margin (c.50% EBITDA margin) compared to traditional courses (c.30 EBITDA margin) to cater for the working class.

 Meanwhile, we expect the group’s earnings to grow in FY15 driven by: (i) higher demand for its medical courses, and (ii) economies of scale from the streamlining of its operations and classes.

Change to Forecasts  Post-results, we have increased our FY15E earnings by 11.3% to RM32.4m after imputing: (i) higher revenue growth from the PACE program and medical courses, (ii) higher student intake, and (iii) lower fixed cost and administrative expenses assumptions in view of its recent streamlining exercise. Meanwhile, we also introduced our FY16E numbers.

Rating Maintain UNDERPERFORM

Valuation  We have increased our SEG TP to RM0.97 (from RM0.85 previously) based on an unchanged FY15 PER target of 22.0x. This is in line with its peer HELP International’s forward PER of 21.7x, based on its privatization exercise.

Risks to Our Call  Higher-than-expected foreign student intake.

 Lower operating cost. 

Source: Kenanga