SAPRES disposed its 49% education arm to ILMU for cash proceeds of RM315m, as expected, with net gains of RM115m. Attractive price tag, but proposed special dividends (11.5 sen) disappointed. Its KLCC JV is the next driver, but contributions may only kick-in after 2020. Strong net cash position of RM162m vs. its market cap of RM140m. Lower FV of RM1.65 still indicating deep value. However, we change call to NOT RATED as value unlocking will take time.

Sale of education arm came through. In March-16, SAPRES entered into a conditional Share Sale Agreement (SSA) with ILMU Education Group S/B (ILMU) to dispose the former’s associate APIIT/APU education arms* for a total sale consideration of RM247.0m or cash proceeds of RM315.0m (inclusive of RM68m dividends from APIIT). The one-off gains on disposal are RM115.1m and the deal is expected to be completed by Aug-16. This does not come as a surprise to us following our SAPRES On The Radar report (16/11/15) which rode on the media article speculating sale of their education arm.

Attractive price tag, but proposed special dividends disappoint. The cash consideration implies 16.1x which is slightly higher than our initial valuations of RM294m @ FY16E PER of 15.0x. Out of the RM315m cash proceeds, only 5% or RM16.1m (11.5 sen) is allocated for special dividends while the remaining is for expansion, repayment of borrowings and working capital. This is sharply below our expectations of a minimum 20% pay-out of cash from disposal. Including the already paid out 3.0 sen (May-2016) for FY17E, total FY17E amounts to 14.5 sen (14.5% yield).

What next? The group will be missing a big driver post disposal of the education arm. Hence its on-going major drivers are Property Investment (profitable) and Aviation (loss making), which we project should likely remain in the red for FY17E. Recall there is the KLCC JV (50% stake) to develop the 1.88 ac land along Jln Kia Peng (GDV: RM1.5b). We are unclear if the group intends to sell or keep the KLCC project, but take the view it is for investment purposes, i.e. no earnings until completion (target 2020). Note that its 50% JV partner, KLCC Holdings S/B, is the parent of KLCC Stapled REIT, which means there is an exit possibility for the JV. We project FY31Jan17E PATAMI of RM107.9m including gains on disposal while the project core LATAMI of RM7.2m. FY17E NTA/sh will strengthen to RM3.27 from the gains on disposal.

Strong net cash position post disposal from net gearing of 0.29x (FY16). After repayment of borrowings, expect FY17E net cash position of RM162m (RM1.16/sh) vs. its current market cap of RM140m. Positively, its KLCC project is a Jointly-Controlled-Entity (JCE) implying that most items (e.g. financing costs, borrowings) will be off balance sheet, while majority of project financing at the JV level is already secured. Note that upon completion of the KLCC JV and assuming it is an investment property, expect net gearing to exceed 1.3-1.4x.

Lower FV of RM1.65 (TB@FV RM2.21 previously). We only valued its profitable divisions: (i) investment properties at 0.8x Fwd PBV, (ii) 20% discount to the market valuation of the KLCC JV land, (iii) cash from disposal less repayment of borrowings and payout of special dividends, (iv) 40% discount due to the company holding substantial cash. While the company continues to show deep value, investors will need to take a longer-term view on the stock as it will take time to unlock value and thus, we change our call to NOT RATED.

Source: Kenanga Research - 29 June 2016