Period

1Q15

Actual vs. Expectations

1Q15 net profit (NP) of RM10.8m came in within our expectation at 33% of the full-year estimate. Note that SEG’s 1Q NP generally accounts for c.31%-36% of fullyear earnings based on the historical trend. There is no consensus estimates available for comparison purpose.

Dividends

Above expectation.The group has announced a first interim single tier dividend of 7.0 sen as opposed to our full-year DPS forecast of 9.3 sen, which is a similar quantum to the last financial year as per management's earlier indication. Having said that, we believe this set of dividend quantum may not be sustainable due to its limitation in the Free Cash Flow. Hence we maintain our DPS forecast for now pending for further clarification from the management.

Key Results Highlights

YoY, topline was up by 9.5% to RM67.4m mainly due to the stronger student intake as a result of the marketing initiatives to attract more foreign students. The Group’s operating margin, meanwhile, also improved to 18.7% (vs. 14.0% in 1Q14) mainly due to: (i) better product mix (which include the higher-margin online program), and (ii) higher demand for its high-end programmes such as health sciences segment. As a result, the Group’s net profit increased by 52.3% to RM10.8m.

QoQ, 1Q15 turnover improved by 14.4% to RM67.4m (vs. RM58.9m in the preceding quarter), mainly due to the stronger student enrolment given that the 1Q traditionally has higher intake as opposed to the 4Q. Its EBIT, meanwhile, soared by 231.2%, thanks to: (i) higher revenue, and (ii) lower rental cost. That, coupled with lower finance cost incurred this quarter (-93.1%) has led the Group’s net profit to increase by 130.1% to RM10.8m.

Outlook

The group continued to see more student enrolments underpinned by its aggressive marketing initiatives via partnering with overseas education agencies. Besides, SEG is also planning to offer more courses for its online program (PACE program) to cater for the working class community, which consist of higher margin products (c.50% EBITDA margin) as compared to the traditional courses (c.30% EBITDA margin).

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

Change to Forecasts

We make no changes to our FY15-16E NPs of RM32.4m-RM40.5m as the 1Q15 results were within our expectation.

Rating

Maintain UNDERPERFORM due to its rich valuation.

Valuation

Our TP of RM0.97 is based on an unchanged targeted FY15 PER of 22.0x, which is in line with its peer HELP International’s privatization exercise forward PER of 21.7x.

Risks

Favourable changes in higher education policy by MoE.

Higher-than-expected foreign student intake.

Lower operating cost.

Source: Kenanga Research - 14 May 2015