SEG International - Below expectations again!

Period  4Q12/ FY12

Actual vs. Expectations  The FY12 net profit of RM61.3m was below expectations and only accounted for 75.7% and 74.8% of ours and the street’s full-year estimates respectively. The main culprits were due to 1) higher number of graduating students, 2) lower GP margin of 72.1% (vs FY11: 75%) as a result of a higher academic staff costs, and 3) higher SG&A cost of RM154.6m (+8%) that led by higher start-up cost of some new introduced programmes.

Dividends  No dividend was declared during the quarter. The FY12 total net dividend of 4.8 sen/share was below our 6.7 sen/share net dividend assumption.

Key Result Highlights  YoY, the FY12 revenue of RM285m increased by 2% due to the rising students base, which up 6% YoY to 27k. Nonetheless, the group’s net profit plunged by 17% to RM60.3m (FY11: RM72.3m) mainly due to 1) lower GP margin that led by higher academic staff costs and 2) higher SG&A cost of RM154.6m (+8.0%) as a result of the start-up cost that launched a number of high ticker programmes (e.g. dentistry & optometry course) which required higher manpower as well as investment costs, and 3) lower other income as a result of lower hostel rent that led by higher number of graduating students.

 QoQ, the revenue was down by 29% to RM52.7m in 4Q12 due mainly to the higher number of graduating students in the quarter. Although the group enjoyed a tax benefit of RM5.3m as a result of higher number of foreign student enrolments during the quarter, most of its costs (i.e. academic staff costs and administrative costs) are fixed in nature, thus dragged down its net profit by 84% to a scant RM2.5m (3Q12:RM15.8m). The NP margin was dragged lower as well to 4.8% from 21.3% in 3Q12.

Outlook  Remains intact underpinned by more new programmes (i.e. 10-20) to be introduced within this year, particularly from an increasing number of its home-grown and high-ticket programmes. Management is confident SEG will be able to recover from the higher student graduations shortfall in FY13 by offering a wider spectrum of programmes.

Forecasts  Post-result, we have reduced our FY13 revenue forecasts by 2.6% to RM346.4m after lowering our student growth assumptions to 8.0% (from the previous 20%), in line with the historical Malaysia’s Private HEI student enrolments trend that recorded a 9-year CAGR of 8.0% (2001-2010).

 We also have trimmed our FY13 net profit forecasts by 26.7% to RM74.7m (vs. RM101.8m previously) after imputing in a lower GP margin of 75% (from the previous 78.9%) in view of its growing fixed nature costs, e.g. academic and administrative staff costs. We also introduced our FY14 forecast numbers.

Rating   Maintain MARKET PERFORM

Valuation  To align with our earnings downgrade, we have lowered our TP to RM1.75 (from RM2.02 previously) based on average 2-year Fwd PER of 16.3x.

Risks  Slow down in student enrolments.

Source: Kenanga