This article first appeared in The Edge Malaysia Weekly on May 6, 2024 - May 12, 2024

SEG International Bhd (SEGi) received a notice of mandatory general offer (MGO) for 45 sen per share last week. The last time that the tertiary education group got an MGO was 12 years ago when Navis Capital Partners Ltd wanted to take it private at RM1.714 per share and RM1.214 per warrant in mid-May 2012.

The latest MGO was launched by long-time shareholder Tan Sri Clement Hii after Navis’ investment vehicle Pinnacle Heritage Solutions Sdn Bhd sold him its remaining 20.55% stake (251.07 million shares) for RM112.98 million cash, or 45 sen per share.

The purchase of the block of shares has bumped up Hii’s shareholding to 53.01%. As a result, Hii is obliged to make an MGO. The offer price was 32% below the closing price of 66 sen on the announcement day.

Some quarters are curious as to why Navis was willing to part with its investment in SEGi at such a big discount to market value. Like it or not, the acceptance of the share sale at a sharp discount might be seen as Navis wanting to exit SEGi at any cost. This will result in speculation on what Navis knows about SEGi that others don’t. 

To recap, Navis’ total investment in SEGi was estimated at RM459.13 million for a 41.7% stake, including shares bought via a takeover bid and the conversion of warrants.

For Hii to act in concert, Navis had signed a shareholders’ agreement with him when the fund launched its takeover bid. Under the terms, the duo would act in concert where if any party to the shareholders’ agreement objects to any reserved matter, the other would exercise voting rights at the shareholders’ or warrant holders’ meeting of SEGi to vote against such proposed action.

In addition, both parties had to notify each other whenever they were approached about divesting their stake. The agreement has been terminated in view of the latest share sale.

The privatisation exercise, however,  fell through as Navis did not garner enough acceptance.

At the offer price of RM1.714 per share, SEGi was valued at RM1.1 billion in 2012. However,  Hii’s current offer price of 45 sen per share values the tertiary education group at RM549.45 million only.

Its existing market capitalisation amounted to RM788 million based on the closing price of 64.5 sen last Friday.

It is worth noting that the offer price of RM1.71 in 2012 would have been 51.16 sen per share having been adjusted for the company’s regular dividend payments, capital repayment in 2017 and a five-for-seven bonus issue.

Using 51.16 sen as the yardstick, the discount on Navis’ stake is not as sharp. Still, Navis is selling its shares at a 12% discount after all.

Having invested a whopping RM459.13 million, Navis, on the other hand, received dividends totalling RM178.3 million plus capital repayment of RM40.2 million (15 sen per share) over the past 12 years, according to Asia Analytica’s analysis. Being a shareholder of SEGi, Navis was rewarded with RM218.5 million cash, which was roughly 48% of its investment.

On top of that, SEGi undertook a five-for-seven bonus issue in 2017 together with capital repayment. The number of shares that Navis held increased to 459.56 million.

In September 2022, Navis started trimming its equity stake following the amendments to the share agreement between the private equity (PE) fund and Hii to regularise their relationship as the major shareholders.

Navis sold some 160.9 million shares in a few tranches over the past two years. Based on the closing price on the filing dates, Asia Analytica estimated that the fund could have fetched about RM134.29 million.

In a nutshell, Navis received roughly RM247.27 million from share sales plus RM218.5 million from dividends and capital repayment, which come up to RM465.5 million in total.

All in all, Navis’ investment gain is estimated to be RM6.66 million, which translates into a return of 1.45% over a 12-year period (see table).

Navis’ takeover bid at RM1.714 (non-adjusted price) valued the education group at 12.5 times price-earnings ratio (PER) based on earnings per share (EPS) of 14.11 sen, which was below its 12-month average of 18.6 times. 

Its independent adviser, Affin Investment Bank, then recommended that minority shareholders decline the deal as the offer price was deemed “unreasonable and unfair”.

The PE fund appeared to have got a good bargain at that point in time.

Nonetheless,  SEGi shares were then valued based on the record high earnings in the financial year ended Dec 31, 2011 (FY2011).  The education group posted its highest ever net profit of RM72.2 million that translated into an EPS of 14.11 sen, compared with 8.7 sen in FY2010. Until today, SEGi has not broken the record profit as yet.

Furthermore, Navis’ takeover bid came after the stock price had rallied for two years between 2010 and 2011 when the education sector was well sought after amid expectations of an influx of foreign students to Malaysia. 

Navis’ exit from the tertiary education group after 12 years begs the question whether minority shareholders should follow suit by selling shares on the open market for a higher price.

SEGi has been profitable even during the Covid-19 pandemic when many companies were in financial distress, but it might not have much to shout about in terms of exponential growth. Its annual net profit attributable to shareholders was in the RM40 million to RM50 million range between FY2017 and FY2022.

However, FY2023 was a bad year for SEGi. Its net profit contracted 71% to RM11.57 million, against RM40.18 million in FY2022. EPS fell to 0.95 sen from 3.28 sen.

The group attributed the earnings contraction to a large graduating batch of postgraduate students who enrolled in the previous years. 

This could be a sign that SEGi is facing a slowdown in enrolments. 

SEGi shares are currently trading at PER of over 60 times given the historical EPS of 0.95 sen. 

Nonetheless, SEGi declared a dividend per share of 1.3 sen, which was higher than its EPS. 

The education group has declared dividends yearly without fail over the past 12 years.

Notably, SEGi’s board allows the company to pay higher dividends than its annual net profit. Since FY2013, the year after Navis bought into it, the group has paid more than it earned in six out of the past 10 years (see Chart 1) when its cash reserves expanded.

SEGi’s healthy cash flow has enabled the regular payouts. The company’s cash and cash equivalent has not been less than  RM50 million over the past decade.

Subsequent to the capital repayment in 2017, SEGi kept its payout ratio at less than 100% for four years.  

As its cash pile ballooned to RM118.7 million in FY2021, SEGi again started declaring higher dividends than net profit in the following two years. Consequently, its cash balance dropped to RM93.19 million in FY2022 and RM65.45 million in FY2023 due to the generous payout.

Hii’s 32.46% stake earned him a total dividend of RM148.44 million between FY2012 and FY2023 — a sum that is more than enough to buy out Navis’ stake.

SEGi’s borrowings are not high, below RM30 million in the past five years. However, the group’s lease liabilities have been substantial, exceeding RM100 million due mainly to its campus and facilities being under sale and leaseback agreements.

Its lease liabilities swelled to RM161.76 million at end-2023, compared with RM118.88 million in FY2022 and RM127.95 million in FY2021.

Given the 32% discount from the market price, simple logic dictates that minority shareholders are unlikely to accept Hii’s  offer, unless some unforeseen circumstances cause a big drop in SEGi’s share price before the expiry of the MGO.

With Hii controlling more than 50% now, will SEGi be even more generous in its dividend payment? More importantly,  will SEGi be able to boost student enrolment which is needed to drive earnings? 

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