This article first appeared in The Edge Financial Daily, on November 13, 2015.

SEG International Bhd 
(Nov 12, Nothing transacted)
Maintain underperform with a downgraded target price (TP) of RM1.18: SEG International Bhd (SEGi) reported a net profit of RM5.1 million (+9.4% year-on-year [y-o-y]), -36.1% quarter-on-quarter [q-o-q]) in the third quarter ended Sept 30 (3Q15), bringing its nine months 2015 (9MFY15) net profit to RM23.9 million which accounted for about 63% of our full-year forecast. 

The key culprits were mainly: i)lower- than-expected revenue; and ii)higher-than-expected administrative expenses.  

Y-o-y, SEGi’s revenue was up by 5.8% to RM193.8 million mainly due to a better product mix and stronger student demand for higher-end programmes (which include higher level business and health science courses). 

Operating profit improved to RM28.2 million versus RM23.2 million in 9MFY14, underpinned by a better product mix (which includes higher-margin online programmes) with margin enhanced to 14.6% compared with 12.6% a year ago. The strong earnings before interest and tax (Ebit) led SEGi’s net profit to surge 27.7% to RM23.9 million. 

Q-o-q, SEGi’s revenue dipped by 5.7% to RM61.4 million, no thanks to the lower enrolment numbers as there was only one intake during the quarter compared with two intakes in the previous quarter. 

Its Ebit, meanwhile, declined to RM6.6 million (-24.4%) as a result of lower other income (that is rental and dividend income). The lower Ebit coupled with higher effective tax rate (20.4% versus 7.9%, as a result of higher deferred tax expense) caused the group’s net profit to dip 36.1% to RM5.1 million.

Moving into FY16, SEGi continues to see stronger enrolment numbers coming from foreign students’ intake, underpinned by increasing efforts in extending its presence regionally. 

Meanwhile, we also expect SEGi to continue expanding its offering of courses under its online programme (Professional and Continuing Education [Pace] programme) to cater for working adults. 

We view that this will continue to be the key driver for SEGi’s earnings moving forward given that the Pace programme attracts a higher margin, about 50% earnings before interest, taxes, depreciation and amortisation (Ebitda) margin, compared with the traditional courses (about 30% Ebitda margin). 

Group earnings are expected to grow in FY16 driven by: i) stronger demand for its higher end programmes; and ii) economies of scale from the streamlining of its operations and classes.  

Post-results, we have lowered our FY15/16 expected net profit by 7.5%/2.8%, after lowering the year-end student number assumption to 26,500/27,000 for FY15/16E (from 27,200/28,600 previously), and raising administrative expenses. 

Maintain “underperform” due to its rich valuation. Our TP is lowered to RM1.18 (from RM1.21 previously), based on targeted price-earnings ratio (PER) of 22 times, which is in line with its peer HELP International’s privatisation exercise forward PER of 21.7 times. — Kenanga Research, Nov 12