SEG International (“SEG”) - 9M12 lower due to higher expenses

Period    3Q12/9M12

Actual vs.  Expectations

 The 9M12 net profit of RM57.8m was below the street and our expectations and accounted for 56.8% and 60.8% of ours and the street’s full year earnings estimates respectively. The group’s 9M12 revenue meanwhile accounted for 70.4%  and 69.1% of ours and the street’s FY12 revenue estimates. 

Dividends   Declared a single tier interim dividend of 5 sen/share which will be paid on 8 January 2013.

 In line with SEG’s future expansion plans, the group has revised its current dividend policy of a 50% payout to a discretionary policy, which will depend on the group’s future cash flow ability.

Key Result Highlights

 YoY, the 9M12 revenue of RM232.3m increased by 12% mainly driven by 1) an increase in the number of local and overseas student enrolment, 2) more new courses launched by its overseas partner universities and 3) an increase in SEG’s home-grown programmes. Nonetheless, the group’s net profit only grew by a mere 6% YoY to RM57.8m due to certain maintenance works on the campus buildings, an increase in lease rental and also higher administrative expenses (+10.2%) e.g. salaries as a result of the faculties expansion after its flagship campus in Kota Damansara was upgraded to a full university status by MOHE in September.

 QoQ, the revenue was down by 7% to RM74.3m during the quarter due mainly to the higher number of graduating students in the quarter. The group’s net profit, however, dipped by 22% to RM15.8m as a result of a lower EBIT margin of 26.4% (2Q12: 31.0%) from higher administrative and other expenses and a higher effective tax rate of 19.6% (2Q12: 18.8%). 

 We are not surprise in the change of the group’s dividend policy judging from its ambition to become an integrated education player (pre-school, high school and university education provider). It is planning to build an international school in Setia Alam in 2013, which could mean a higher capex will be needed by the group going forward. 

Outlook   Remains bright underpinned by more new programmes to be introduced within this year, particularly from an increasing number of its own home-grown programmes.

Forecasts   Post-result, we have reduced our FY12 and FY13 revenue forecasts by 2.7% and 4.8% after lowering our student growth assumptions to 8% and 10% (from the previous 10% and 12%) respectively, similar to that of Malaysia’s Private HEI student enrolments of 9-year CAGR of 8.0% (2001-2010).  

 In addition, we also have trimmed our FY12-FY13 net profit forecasts by 7.9% and 7.2% to RM93.8m and RM116.9m respectively after inputting a higher SG&A cost assumption in view of the growing administrative expenses.

Rating  Maintain OUTPERFORM

Valuation    Lowered TP to RM2.32 (from RM2.45 previously) based on an unchanged +1SD Forward PER level of 13.7x (vs. 13.4x previously) over our FY13 EPS estimate of 17.0 sen.

Risks   A reduction in its student enrolments.

Source: Kenanga