Investment Merits

• New national curriculum for schools to drive revenue growth

• Acquisitions and new direct marketing license would broaden income streams

• Investments in digital educational products to sustain future growth

Company Profile

Sasbadi Holdings (Sasbadi) is principally a publisher of educational materials. These materials are focused on the primary and secondary school education system based on the Malaysian National School Curriculum (MNSC). The group expanded into the Chinese language segment via the acquisitions of a 70%-stake in Sanjung Unggul SB in Aug 2015 and a 100% stake in United Publishing House (M) SB (UPH) in Aug 2016. Sanjung Unggul caters to students in national-type Chinese schools (SJKC), while UPH has a large number of syllabus and non-syllabus based titles, and an established distribution network in the Chinese schools segment. In FY16 (Aug), publication of materials for MNSC accounted for 64% of operating profit, while another 10% came from the newly-added Chinese language segment.

Highlights

Revenue uplift from revamped MNSC curriculum... The publishing of printed educational materials based on the MNSC is expected to see strong growth in FY17-18. This was after a softening of the domestic economy in FY16, which caused sales to stagnate. In mid-2016, the Education Ministry (MOE) revamped the national curriculums for primary and secondary schools, ie the Standard Based Curriculum for Primary Schools (KSSR) and Standard Based Curriculum for Secondary Schools (KSSM) respectively. There would be tenders for new KSSR and KSSM textbooks for schools nationwide post this progressive revision of the school syllabus. We also expect Sasbadi to introduce new titles to cater to the change in curriculums. The last reviews for KSSR and KSSM were in 2011 and 1989 respectively.

…expansion in Chinese language segment, and... Sasbadi is augmenting its position in the Chinese language market with the UPH acquisition. UPH widens its offerings for the Chinese language segment with its education-related and non-education products. Concurrently, Sanjung Unggul has an estimated 50% market share in the Chinese textbook market.

…a new marketing strategy for digital offerings. In Apr 2016, Sasbadi was granted a direct marketing license to sell its interactive digital/online learning portal, ie i-LEARN Ace. This puts it at the forefront of supporting the MOE’s Malaysia Education Blueprint 2013-2025. The blueprint intends to leverage on information and communications technologies (ICT) to scale up quality learning nationwide. Management is confident demand for technology-enabled solutions in teaching and learning would grow at an accelerated pace in the coming years.

Ready to support growing emphasis on science, technology, engineering and mathematics (STEM). As a distributor of Lego robotics, Sasbadi can benefit from the Government’s growing emphasis on STEM. In Dec 2016, it entered into a memorandum of understanding (MOU) with University Malaysia to collaborate on research and product development related to robotics and STEM education.

Will continue to pursue inorganic growth. Having successfully completed two acquisitions, Sasbadi intends to use this inorganic strategy to accelerate growth. That said, management has – among several acquisition prerequisites – a criteria that the takeover would be done with a single-digit P/E multiple. The firm is keen to widen its publication portfolio to include general titles that cater to school leavers, particularly in the Malay and Chinese language mediums. Funding of the acquisitions would be via a combination of internally-generated funds and funds raised via the capital markets.

Company Report Card

Latest results. Net profit jumped 113% YoY to MYR4.34m in 1QFY17. This was supported by robust revenue growth of 48% YoY, which came from the delivery/supply of textbooks and robotics to schools under contract with the MOE, increased revenue from the printing of Chinese school textbooks (with maiden contributions from UPH – acquired in Aug 2016), and commencement of direct sales and network marketing of the group’s online and digital products.

Balance sheet/cash flow. At end-1QFY17, Sasbadi had net debt of MYR11.9m, with net gearing at a very comfortable 8%. This was compared with a net cash position of RM5.8m in FY16.

ROE. Annualised ROE was 11.6% in 1QFY17, down from the 13.8% achieved in FY16. The lower ROE was mainly due to the seasonality in Sasbadi’s businesses, where sales in 2Q of its financial year are usually the strongest (accounting for 36-37% of full-year revenue). We expect ROE to improve to 15% in FY17.

Dividend. No dividend was declared for 1QFY17. Sasbadi has a policy of paying out up to 50% of annual earnings. For FY16, its dividend payout ratio was 36%. We forecast DPS of 2.5 sen for FY17 vs 2.3 sen in FY16.

Management. Sasbadi is helmed by its two co-founders, ie Mr Law King Hui (group MD) and Mr Lee Swee Hang (the group’s publishing director). Mr Law has more than 36 years of publishing experience, while Mr Lee is responsible for the editorial and production teams. Mr Law has an effective 18.3% stake in Sasbadi.

Recommendation

We like Sasbadi for its growth strategies that places it in a good position to benefit from resilient demand for educational resources, as well as the Government’s education transformation programme. We value the stock at MYR2.00, which is based on 18.5x FY18F P/E. This is a 10% discount to the average 21x P/E multiple for comparable stocks.

Source: RHB Securities Research - 5 May 2017