SEG International - Venturing Into Private Schools

THE BUZZ

SEG International (SEGi) announced that it has entered into a conditional Sale and Purchase Agreement (SPA) with Bandar Setia Alam SB, a wholly-owned subsidiary of SP Setia, for the proposed acquisition of a parcel of land measuring about 12 acres in Bandar Setia Alam for a total purchase consideration of RM52.3m.

OUR TAKE

Briefly on the land. The target plot is a parcel of vacant freehold commercial land located at the intersection of Persiaran Setia Perdana and Persiaran Setia Murni in Setia Alam, Seksyen U13 in Shah Alam. It is approximately 15km northwest of Shah Alam city centre and some 8km north of Klang town centre. The land encompasses a total area of about 12 acres, translating into a purchase price of RM100 per sq ft, which we deem fair.

Proposed international school. Under the terms of the SPA, the land would be used solely and strictly for the setting up of an international school. Construction of the building should commence within 2 years from the date of delivery of vacant possession of the said land. SEGi expects construction works to be completed within the next 3 years, with the new facilities targeted to accommodate at least 3,000 students.

Earnings contribution at RM15m-RM20m p.a. While it is too preliminary to ascertain the total development costs involved, we estimate that the international school could contribute some RM15m-RM20m p.a. to SEGi’s bottom-line, assuming an average tuition fee of RM30k for a total number of 3,000 students. From our quick checks, only Tenby Schools is present in the said area at the moment. Tenby charges approximately RM25k p.a. for its international school students and RM12k p.a. for its private school students. The Tenby group is also set to open its 3^rd campus, called Setia Eco Gardens International School, by Jan 2013.

Financing from cash pile plus borrowings. As of March 2012, SEGi’s net cash balance stood at RM33.7m. We believe this acquisition would not strain its books significantly, with a debt drawdown likely. Management confirmed that the development blueprint, including the capital expenditure required to develop the international school, is still being finalized. We estimate that the capital expenditure will likely range from RM50m-RM80m.

BUY. We applaud the move as it represents part of SEGi’s strategy to diversify from its stronghold in the tertiary education segment and to penetrate into the fast-growing private education sector. Following the Ministry of Education’s decision to remove the quota on Malaysian students in international schools in May this year, we expect the demand for private education to accelerate. No changes to our forecasts at this juncture. Maintain BUY, with our FV retained at RM2.19, based on 18x FY12 PER and a fully enlarged share base of 748.4m.

Source: OSK