Period

2Q15/1H15

Actual vs. Expectations

SEG’s 1H15 net profit (NP) of RM18.8m came in above expectation, at 58% of our full-year forecast. There is no consensus estimates available for comparison purposes.

Overall, the 2Q15 performance was mainly driven by better product mix and stronger demand for higher margin programmes.

Dividends

It declared a first interim NDPS of 7.0 sen (ex-date: 17 Jun), translating into a payout ratio of 155%. This accounts for 64% of our full-year DPS forecast of 11.0 sen. While there is no indication from management whether they will be declaring a similar quantum (11.0 sen) as for the last financial year, we are maintaining our DPS forecast for now pending further guidance from the management. Moving forward, we expect the Group to declare a 3.0 sen DPS in FY16 based on a conservative 50% dividend payout ratio.

Key Results Highlights

YoY, topline was up by 7.4% to RM132.4m mainly due to better student enrolments in higher-end programmes (such as higher level business courses and health sciences programmes). The Group’s operating margin, meanwhile, also improved to 16.3% (vs. 12.7% in 1H14) underpinned by: (i) better product mix (which include the higher-margin online programs), and (ii) higher demand for its higher-end programmes. As a result, SEG’s net profit surged by 34.6% to RM18.7m.

QoQ, the 2Q15 revenue slipped by 3.4% to RM65.1m (vs. RM67.4m in 1Q15), mainly due to the weaker student enrolment given that 1Q traditionally has a stronger intake as opposed to the 2Q. EBIT dipped 30.6% to RM8.7m, no thanks to higher cost incurred as the Group is expanding its workforce. Weighed down by margin compression, the Group’s net profit declined by 26.4% to RM8.0m.

Outlook

The Group is expecting its 3Q15 to be stronger, given that the 3Q traditionally enjoys a stronger student intake compared to the 2Q.

SEG continue to see more student enrolments underpinned by aggressive marketing of its online program (PACE program) to cater for the working adults community. The PACE program attracts higher margins (c.50% EBITDA margin) 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 higher end programmes, and (ii) economies of scale from the streamlining of operations and classes.

Change to Forecasts

We have increased our FY15 net profit forecasts to RM35.3m (+9.0%) after imputing improved margin assumptions.

Rating

Maintain UNDERPERFORM due to its rich valuation

Valuation

Our TP is raised to RM1.21 (from RM0.97 previously) as we roll over our forecast to FY16E based on targeted PER of 22.0x, which is in line with its peer HELP International’s privatization valuation of forward PER of 21.7x.

Risks

Favourable change in higher education policy by MoE.

Higher-than-expected foreign student intake.

Lower operating cost.

Source: Kenanga Research - 29 Jul 2015