Masterskill riding on the healthcare wave

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Masterskill Education Group Bhd
(May 12, RM2.22)
Initiating coverage with outperform call at RM2.27 with fair value of RM3.74
: Masterskill has built its reputation in the provision of nursing and allied health education in Malaysia. It currently has 18,399 students enrolled in its diploma and degree programmes, expanding at a compound annual growth rate (CAGR) of 28.3% from 2004 to 2010.

Masterskill's growth in the next few years will be propelled by: (i) An increasing demand for nurses. The government is targeting a ratio of one registered nurse to 200 population by 2020 from the current ratio of 1:500. In 2008 (latest data available), there were 54,000 registered nurses, implying a deficit of 81,000 nurses (based on 27 million population).

With teaching facilities producing about 6,000 to 7,000 nurses per year, the shortage will mean that the demand for Masterskill's nursing courses will remain high for the foreseeable future;

(ii) New courses in the pipeline. Masterskill plans to introduce new programmes in the allied health and medical education disciplines. The group has lined up seven new programmes to be introduced in 2011, yielding high margins that will help to drive its margins moving forward; and
(iii) An increase in student enrolment. Masterskill has received approval to offer a Bachelor of Medicine and Surgery programme with a quota of 100 students at its Johor campus. In addition, it will be building a flagship campus (capacity of 20,000 students) in Bandar Baru Bangi. Phase 1 of the new campus is targeted for completion in 4QFY12 while Phase 2 is due to be ready in FY13.

Risks include: (i) changes in the requirements set by governing bodies; (ii) a change in policy by the government; and (iii) high foreign shareholding (approximately 56%).

We project FY10/13 revenue CAGR of 13.4%, driven primarily by the increase in student enrolment as well as a gradual increase in fees. Our FY10/13 net profit CAGR, however, is expected to grow 14.7% as a result of improved operating leverage on the back of facility integration and economies of scale.

We believe Masterskill's price-earnings ratios are attractive, trading at 7.6 times FY11, compared with peers HELP International Corp Bhd and SEG International Bhd, that trade at FY11 PERs of 15.6 times and 14.3 times. This is unjustified given its relatively larger market cap size and'' higher margins.

Concerns over the availability of National Higher Education Fund (PTPTN) loans are also overplayed in our opinion. Our fair value for the stock is RM3.74, based on target FY11 PER of 12.5 times, 15% discount to the sector average FY11 PER of 15 times. We initiate coverage with an 'outperform' call on the stock. ' RHB Research, May 12

This article appeared in The Edge Financial Daily, May 13, 2011.

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