SEG International - A more cautious outlook

We met SEG’s founder and managing director Dato’ Seri Clement Hii and its top management in a meeting and came back with  a more cautious view now on the group’s future outlook due mainly to several issues such as 1) a higher than expected staffs cost increase as a result of its ongoing faculty expansion; 2) slower pace of net increase in the number of students due to the high number of nursing student  graduating going forward; 3) the group’s unfavourable decision to change its 50% dividend payout policy to a discretionary dividend policy due to business expansion, i.e. International School; and 4) it needs  time to solve some operational issues on its SkillsMalaysia INVITE project before a major rollout targeted by mid-2013. Given the limited price upside and the more cautious outlook for SEG, we are downgrading our call to MARKET PERFORM with a lower TP of RM2.02 (vs. RM2.32 previously) based on an unchanged FY13 forward PER level of 13.7x over our revised FY13E EPS of 14.8 sen (vs. 17.0 sen previously). Our FY13 share capital calculation is based on 689.4m shares after assuming 27.6m conversion of the group’s outstanding warrants in FY13.

Change of dividend policy.  In line with SEG’s future expansion plans to become an integrated education player (pre-school, primary and secondary school), the group has recently revised its dividend policy from a 50% dividend payout to a discretionary policy, where the payout will depend  on the group’s future cash flow ability. Management has indicated that the change was because it needed to conserve funds for future growth with its upcoming  international school project capex budgeted at an approximately RM180.0m (inclusive land purchase and construction of building). While the school is tentatively scheduled to be completed by end-2014, we believe that the group will gear up its existing net cash position at the expense of a higher dividend payout going forward. Hence, we have revised down our dividend payout assumption for FY13 to 30% (vs. 50% previously) or a 2.2% of net dividend yield, based on a more conservative view while maintaining our FY12 dividend payout assumption at 50% or a 3.0% of net dividend yield.

Expecting bulk of its nursing students to graduate in FY12/13. According to management, there were about 2.5k nursing students (or 9% of the total students) graduating in 3Q12, which has resulted in a sharp fall in SEG’s total student population. We believe the large graduation number  was partly due to the higher number of nursing student intake during the “nursing bandwagon” in 2009. However, after the government imposed subsequently 1) a higher minimum entry requirement for the diploma nursing programme from 3 credits to 5 credits and 2) reduced the value in the PTPTN loan scheme for diploma students, the enrolment rate for the nursing programme has since shrunk. In addition, management also foresees an additional two batches of nursing students to graduate in FY13. It aims to replenish the shortfall with the intake of more international and local students for various other programmes. All in, we estimate SEG to have 27.5k (+8% YoY) and 30.3k (+10% YoY) students in FY12 and FY13 respectively (+16% YoY growth in FY11).

Resolving operating issues for SkillsMalaysia INVITE project. Recall that SEG was appointed by the Malaysian government as Project Leader for SkillsMalaysia International Technical Education and Vocational Training Programme (INVITE) back in 2011 to provide technical and skills-based training to foreign trainees and learners. We understand that the progress of this G2G initiative project is currently at an advanced stage. SEG needs, however, to solve some operational issues before a major rollout targeting by mid-2013. Although the current number of trainees is small at this juncture, we gather that the MOU allows for approximately 10,000 trainees from Vietnam to be trained under this project from 2012 to 2015 for various technical and skill-based courses. The participants will be mainly supported and funded by the Government of Vietnam. 

Reducing our earnings forecasts. Management has clarified that the higher SG&A cost during 9M12 was mainly attributed to 1) higher staff cost due to faculty expansion and salaries increase; 2) a one-off building maintenance of approximately RM2m and 3) higher lease rental. After taking all the above-mentioned factors into consideration, we have trimmed our FY12E-FY13E net  profits by 15% and 13% to RM79.7m and RM101.8m, respectively, mainly to impute higher SG&A margin assumptions of 52.1% (+2.9%) and 50.9% (+3.8%) for those years.

Source: Kenanga