We take a look at the latest news to hit the education space to determine the impact of the delay in foreign student visa approvals on higher education institutions. We expect earnings to be affected in the near term if the delay persists. All in, we maintain NEUTRAL on the sector, with Prestariang (BUY, FV: MYR2.11) as our top pick.

- Background on EMGS. The Ministry of Higher Education (MoHE) has recently established a new agency, Education Malaysia Global Services (EMGS), in February to further boost the government’s initiative of achieving its target of 200,000 international students by 2020. EMGS was set up to control and streamline the intake of foreign students into the country, with the assurance that all completed foreign student visa applications will be processed within 14 days after submission.

- Tightening of entry requirements. EMGS has also taken upon itself to tighten the entry requirements of foreign students and have taken stringent measures such as the issuing of student cards, verification of acceptance from a higher education institution, mandating medical insurance and Bahasa Malaysia language courses. We believe that this
could potentially mitigate the misuse of foreign visas by students who enter the country under false pretenses and attract quality international students.

- Delay in foreign students’ visas. Despite early submissions from students, it was revealed that foreign students are still facing delays in getting their visa applications approved, which in turn has affected their ability to commence classes as scheduled. This could possibly be attributed the strict EMGS regulations that institutions go through when handling and processing international students.

- Keeping an eye on SEGi and HELP. The delay in visa application approval, if unresolved, could turn prospective students away and potentially affect the revenues of the education institutions. The earnings of SEG International (SEGi) and HELP International Corp (HELP) may decrease by 10% and 17% respectively if their international student base
were to be cut by half.

- NEUTRAL. All in, we maintain our NEUTRAL call on the sector, as we remain wary in view of a potential decrease in international student growth, which could possibly hurt earnings in the near term pending more affirmations from EMGS to hasten the visa approval process. We continue to like Prestariang (BUY, FV: MYR2.11) for its strong long-term fundamentals and it remains our top pick for the sector.

Near-term earnings could be impacted. With the new implementations in visa applications by EMGS, international students are now required to pay different processing fees of up to MYR1,800 compared to earlier fees of MYR400. The
average cost for an international student to pursue a degree in a private education institution in Malaysia ranges between MYR40,000 and MYR75,000. If the visa delay continues to persist, it could potentially impact the revenues of higher education institutions in the near-term.

Where they hail from. According to MoHE’s statistics, Malaysia currently has an estimated 100,000 international students enrolled in both public and private education institutions. Chinese and Indonesian are the top two nationalities, accounting for 5,272 and 4,806 of the total. We attribute this to the Chinese and Indonesian students being able to relate to the similarity of Malaysia’s culture to that of their own country. However, with the increase in fees as well as the delay in obtaining student visas, we foresee a potential decline in student population from these countries as they may go somewhere less complicated and cheaper to pursue their higher education.

Less social issues. On a lighter note, with EMGS tightening the inflow of foreign students, it could alleviate various social issues associated with foreigners exploiting the student visa route to reside or work illegal in the country. Although crime rates associated with foreigners are not rampant, we see this as a positive move by the Government to completely eradicate this problem before it develops into a more serious issue.

Sabah and Sarawak exempted. EMGS is meeting with multiple private higher education institutions to resolve the problems relating to the approval of student visas. Sabah and Sarawak, however, are not affected by the new regulations as they have yet to be passed through the respective state legislative assemblies.

Companies Highlights

SEGi’s earnings may be affected. Among the companies under our coverage, SEG International (SEGi) and HELP International (HELP) carry an array of international students under their belts. As of March 2013, SEGi has 27,000 students on board, of which 15%, or 4,100, are international students. The group’s international student base had surged by 71% and 31% in 2011 and 2012 respectively. We believe that if the delay in visa approval continues, the group’s earnings could potentially be affected. We are already anticipating a weaker 1QFY13 due to its slow student growth.

Worst case scenario for SEGi? Assuming that SEGi’s student base decreases to 25k, factoring in lower student growth due to the decline in international students entering the country, we believe the group may potentially see a 8% to 10% dip in net profit in a worst case scenario. In view of this, we continue to see downside risks to its near-term earnings. Hence, we maintain our SELL recommendation, with our FV now at MYR1.20, pegged to an existing 14x FY13 P/E.

HELP not too far behind. HELP’s current student base is 11,000, 15% of which are international students. If its international student base were to be cut by half, we expect its earnings to drop by approximately 15% to 17%. While we like HELP’s clean books and experienced management, we remain cautious pending more affirmative earnings growth from the group as we anticipate improvement and faster visa approvals from EMGS. Therefore, we reiterate our NEUTRAL call, with our FV now at MYR1.88, based on a 10x FY13 P/E. We project net cash per share of MYR0.45 for FY13.

Prestariang and Masterskill unaffected. The other companies under our coverage – Prestariang (BUY, FV:MYR2.11) and Masterskill (NEUTRAL, FV:MYR0.61) – are unaffected. Prestariang’s main focus is in the provision of Microsoft software licenses to Malaysian government ministries as well as in professional training and certifications for locals. Masterskill, meanwhile, offers niche allied healthcare education and has yet to expand its courses to overseas students.

Prestariang still our top pick. We expect its new boutique university – Universiti Malaysia of Computer Science & Engineering (UniMy) – to generate MYR15m-MYR20m of annual recurring earnings to the group. Also in view of its asset light business as well as its sturdy long term fundamentals, we forecast a dividend payout of 11.0 sen for FY13 and 12.0 sen for FY14. Hence, maintain BUY, with our FV of MYR2.11 based on an unchanged 10x FY13 P/E.

A new master for Masterskill. It was recently announced that Masterskill’s Dato’ Sri Dr Edmund Santhara has stepped down from his role as CEO of the group and the company’s second largest shareholder, Siva Kumar M Jeyapalan, was appointed to the Board as an executive director. We are positive on this move as it addresses the group’s succession concern, which we believe may have capped its share price performance over the past year. That said, we reiterate our NEUTRAL call for now, with a FV of MYR0.61, based on a 0.7x FY13 P/NTA while we await affirmation from the new management on its operating strategy moving forward.

Maintain NEUTRAL. Overall, we maintain our NEUTRAL call on the sector, as we remain cautious in view of slowing student enrolments due to increasing competition in the education industry as well as the potential decline in international student numbers, which could potentially hurt earnings in the near to mid-term. We continue to like Prestariang (BUY, FV: MYR2.11) for its strong long-term fundamentals and it remains our top pick for the sector.

Source: RHB