Masterskill Education Group - No Signs of Recovery From The Master

Masterskill posted its third consecutive quarterly loss in 2QFY12, sinking deeper into the red with a net loss of RM4.8m. The 1HFY12 core loss of RM7.8m was way below our and consensus estimates, which were both positive previously. As its enrolment base continued to shrink due to net drop in student count, we do not see any re-rating catalysts in the near term. We are discontinuing coverage on the stock and changing our recommendation to NON-RATED. Our previous call was a SELL, at a FV of RM0.66. 

Worst quarter ever since listing. Masterskill’s 2QFY12 revenue came in at RM39.4m (-10.8% q-o-q, -40.2% y-o-y), with a core loss of RM4.8m (+66.0% q-o-q; -141.9% y-o-y). The dismal quarter was the company’s worst ever since listing, having been in the red for three consecutive quarters. We attribute this to the company’s inability to replenish its student base, which we believe has fallen from the peak of 19,000 in 2010 to 12,000 currently. On a YTD basis, its 1HFY12 revenue plunged 40.1% y-o-y to RM83.5m while earnings dived into the red with a core loss of RM7.8m vis-à-vis 1HFY11 net profit of RM34.2m.  

Cash cow milked dry. Masterskill’s balance sheet strength, too, has deteriorated, with its cash pile dwindling to RM43.4m following the payment of a dividend windfall of RM60.1m which it distributed in 1QFY12. With total borrowings now standing at RM67.3m, the company is no longer a cash cow but instead has a net gearing of at 5.4%. Hence, we believe its ability to maintain the 60% payout as witnessed in FY11 and FY10 is likely to be capped until earnings show signs of recovery, which we opine is unlikely within the next six months.

Diversifying offerings will take time. Although Masterskill has proposed to diversify into non-healthcare course offerings with a first intake likely in 1QFY13, the move would require a gestation period of at least six months to a year for earnings to be meaningful, given the stiff competition in the tertiary education sector. As its core focus in nursing and healthcare courses continue to face challenges, we do not foresee any re-rating catalysts over the next six months and hence, are ceasing our coverage on the company with our recommendation changed to NON-RATED. Our previous call on the stock was a SELL at a FV of RM0.66.    

Source: OSK