We recently met up with the management of SEG, which provided us with a better insight of what to anticipate for FY16. 2015 was challenging as student enrolments were undermined by national developments and poor sentiments. While the management has set out initiatives to attract a larger student base and support its revenue, we are feeling cautious given the lack of short-to-medium-term catalysts at this juncture.

FY15 net student base missed management’s expectations. Management guided that FY15 net student base may fall short of its initial expectations by c.20% to 23k students (of which c.20% were foreign students). The country’s challenging economic outlook coupled with the rising cost of living have dampened and deferred domestic students’ willingness to commit financially in furthering their studies in FY15. Foreign students, meanwhile, appear to be adversely affected by the national headlines and developments though the weakening MYR has somehow reduced the negative impact. Despite the group failing to achieve its internal target last year, SEG is confident of growing its student base by 13% (to 26k students) in FY16, mainly underpinned by the weak MYR, which could result in: (i) an increasing proportion of domestic students opting to further their tertiary education locally, (ii) Malaysian students returning from abroad to continue studies locally following the recent suspension of JPA scholarships, and (iii) rise in foreign students to study in Malaysia as a more cost-effective option.

Higher school fee ahead. Management commented that a revision of student fees has been in effect since 2H15, particularly for Health Sciences courses and general administrative fees, to reflect the rise of certain cost factors. While the higher school fees are only applicable to new students, we understand that the hike is expected to lift its FY16 turnover by c.RM5m.

Planting seeds for a greener FY16. Management indicated measures to be undertaken to improve its FY16 student base through: (i) strategic tie-ups and initiatives to tap into the foreign student market which has high growth potential, and (ii) furthering development and expansion of its niche programs, such as PACE, which is increasingly popular given the lack of available alternatives offered by competitors for similar programs. Better profit margins are also anticipated in lieu of: (i) increase in student fees, and (ii) lower administrative expenses.

However, we prefer be conservative with FY16E, as we believe the domestic student market is still weak in lieu of the lack of financial assistance available. As the proportion of domestic students is significantly larger compared to foreign students, a decrease in the domestic student base may offset any increase contributed by foreign students in FY16. Furthermore, the increase in course fees may deter new student enrolments as students are likely to be more price sensitive during periods of poor market sentiments.

Post meeting, we lowered our FY15E and FY16E net earnings by 10.9% and 2.2% to RM268.9m and RM293.4m, respectively. This is in line with the revised student base for FY15/FY16E to 23.0k/24.2k (from 26.5k/27.0k previously). Higher school fees are expected to buffer any sharp fall in net income from the lower student base while providing slight improvements to its EBITDA, operating and net profit margins by c.0.5%. We are maintaining our Underperform call but with a lower TP at RM0.99 (from RM1.18 previously), based on the revised FY16E EPS of 4.5 sen at the unchanged PER of 22.0x, which is in line with its peer HELP International’s privatization exercise forward PER of 21.7x.

Moving to non-core coverage. In view of the lack of key earnings catalysts coupled with reallocation of our internal resources, we have decided to move SEG to our non-core coverage list, which we will feature under the On Our Radar series should there be any meaningful developments. 

Source: Kenanga Research - 19 Feb 2016