Period

3Q15/9M15

Actual vs. Expectations

Below expectation. SEG reported a net profit (NP) of RM5.1m (+9.4% YoY, -36.1% QoQ) in 3Q15, bringing its 9M15 net profit (NP) to RM23.9m which accounted for c.63% of our full-year forecast. There is no consensus estimates available for comparison purposes.

The key culprits were mainly: (i) lower-than-expected revenue, and (ii) higher-than-expected administrative expenses.

Dividends

No dividend was declared during the quarter as expected.

Key Results Highlights

YoY, SEG’s revenue was up by 5.8% to RM193.8m mainly due to better product mix and stronger student demand for higher-end programs (which includes higher level business and health science courses). Operating profit improved to RM28.2m (vs. RM23.2m in 9MFY14), underpinned by: (i) better product mix (which includes higher-margin online programs) with margin enhanced to 14.6% as compared to 12.6% a year ago. The strong EBIT led SEG’s net profit to surge 27.7% to RM23.9m.

QoQ, SEG’s revenue dipped by 5.7% to RM61.4m, no thanks to the lower enrolment numbers as there was only one intake during the quarter as compared to two intakes in the previous quarter. Its EBIT, meanwhile, declined to RM6.6m (-24.4%) as a result of the lower other income (i.e. rental and dividend income). The lower EBIT coupled with higher effective tax rate (20.4% vs. 7.9%, as a result of higher deferred tax expense) caused the group’s net profit to dip 36.1% to RM5.1m.

Outlook

Moving into FY16, SEG continues to see stronger enrolment numbers coming from foreign students’ intake, underpinned by increasing efforts in extending its presence regionally.

Meanwhile, we also expect SEG to continue expanding its offering of courses under its online program (PACE program) to cater for the working adults community. We view that this will continue to be the key driver for SEG’s earnings moving forward given that the PACE program attracts a higher margin (c.50% EBITDA margin) compared to the traditional courses (c.30% EBITDA margin).

Group earnings are expected to grow in FY16 driven by: (i) stronger demand for its higher end programs, and (ii) economies of scale from the streamlining of its operations and classes.

Change to Forecasts

Post-results, we have lowered our FY15/16E net profit by 7.5/2.8%, after: (i) lowering the year-end student number assumption to 26.5k/27.0k for FY15/16E (from 27.2/28.6k previously), and (ii) raising administrative expenses.

Rating

Maintain UNDERPERFORM due to its rich valuation.

Valuation

Our TP is lowered to RM1.18 (from RM1.21 previously), based on targeted PER of 22.0x, which is in line with its peer HELP International’s privatization exercise forward PER of 21.7x.

Risks

Unfavourable change in higher education policy

Lower-than-expected foreign student intake.

Higher operating cost.

Source: Kenanga Research - 12 Nov 2015