Headwinds for education stocks

This article appeared in The Edge Financial Daily, October 17, 2011.

KUALA LUMPUR: The education sector was once an investor darling, but counters like HELP International Corp Bhd and Masterskill Education Group Bhd have headed south due to sector-wide over-expansion, rising competition and lower student intake.

Last month, RHB Research downgraded the sector to “neutral” on fears of a weak market outlook.

“We are turning cautious on prospects for the education sector in the coming quarter given rising macroeconomic headwinds, illiquidity of the stock in the sector, the relative small market cap of education stocks, and high foreign ownership,” it said in the Sept 29 report.

It downgraded HELP and Masterskill to “underperform” from “outperform” and “market perform”, while maintaining an “outperform” call on SEG International Bhd (SEGi).

RHB Research said education stocks were driven by Economic Transformation Programme (ETP) news flow in the past, but now the excitement has begun to recede.

“Entry point-projects (EPP) involving SEGi, such as the establishment of the Early Childhood Care and Education (ECCE) hub and the SkillsMalaysia INVITE programme, are already underway, while the announcement of the gradual liberalisation of the education sector under the Strategic Reform Initiatives is already priced in,” it said.

The research house has cut its FY12 price-earnings ratio (PER) by one or two times for the sector as its previous valuations were “overly optimistic” given the bearish outlook.

The poor outlook for the sector may be evident from the poor showing in financial results for some companies.

For 3QFY11 ended July 31, HELP’s net profit dived 92% to RM245,000 compared with RM3.24 million a year earlier. Its revenue, however, was flattish at RM23.96 million compared with RM23.38 million a year ago. For the nine months to July 2011, HELP’s net profit fell 25% to RM9.48 million, despite a 2.3% increase in revenue to RM79.63 million.
Similarly, Masterskill’s net profit fell 48% to RM11.58 million for 2QFY11 ended June 30, compared with RM22.43 million a year earlier.

Adam Chan Eu-Khin, HELP director of corporate planning, said the drastic fall in profit was mainly due to a one-off RM5 million cost to relocate its HELP ICT College from Klang to Fraser Business Park in Kuala Lumpur.

“As a result, we had to delay enrolment for our new courses as well,” he said.

Analysts, however, have noted that HELP’s earnings would still be flattish on a year-on-year basis without the RM5 million relocation cost.

“The delay caused HELP to postpone enrolment and marketing campaigns for new courses for the January/March intakes this year, which were reflected mostly in the 2QFY11 numbers,” said InsiderAsia in a recent report. It added that with HELP’s promotion to university status, it had to increase its manpower costs.

HELP was elevated to full university status in September, joining the ranks of the country’s 26 private universities.

HELP also saw its intake in Vietnam postponed due to a quality test by the government earlier this year, and had to incur cost to transfer its twinning programmes from HELP University College to HELP Academy.

Despite these headwinds, HELP is optimistic for better days ahead.

“The Vietnamese government has given the green light and we now have 50 students. We are beginning to market and recruit more students and hope to enroll 200 students by end-2012,” said Chan. He added it will also begin marketing to recruit more students after the relocation of its facility to Fraser Business Park.

Chan noted that the weakening US dollar has caused many Chinese students to pursue their education directly in the US and UK instead of Malaysia, and this will be a continuing trend in the future.

He added that given the recent termination of the joint-venture (JV) with Asia Pacific Land Bhd (AP Land), HELP will postpone its expansion plans in China indefinitely.

OSK Research analyst Kong Heng Siong said the termination of the JV with AP Land is a blessing in disguise as HELP would then be able to focus on marketing and improving its operations in the local and Southeast Asia markets.

“If you look at HELP’s operations, it has a firmer presence in Southeast Asia than China. It should definitely focus on recruiting students in this market as Malaysia will become a very attractive destination for tertiary education for those who cannot afford to go to US and UK,” he said.

Kong said he is unperturbed with the RM5 million relocation cost and expenditure to hire new staff, as the “short-term pain” is necessary to secure long-term growth for the group.

“However, HELP is still a niche player and it needs to diversify its offering in order to be able to attract more students in the future. HELP is expanding now, but it needs to ensure that it has enough students to fill the capacity,” he said.

An analyst with InsiderAsia noted that SEGi had experienced a similar gestation period when it expanded in the past, and is confident HELP’s earnings growth will recover in the future.

He said SEGi took a long while to digest all its acquisitions, brands and products.

“It was only in early 2010 that investors really took notice of SEGi’s turnaround and the stock price surged,” he said.

Earlier in the decade, SEGi’s profitability was low. Between 2001 and 2005, it offered courses under different brand names, such as Prime and Systematic. In 2006, the company streamlined its operations and consolidated into six large branches, including its flagship campus in Kota Damansara and used a single “SEGi” brand name.

By 2008, the fruit of the exercise was reaped, as SEGi’s pre-tax profit soared to RM9.88 million from RM2.48 million in 2007. It rose further to RM14.61 million in 2009 and RM54.31 million in 2010.

While the opening of the Fraser Business Park branch this year and the new Subang 2 campus in 2013 could cause some volatility in HELP’s medium-term earnings, the analyst is optimistic it will set the foundation for stronger growth in the future. “HELP is investing for the future,” he said, adding that another avenue for growth is its planned diversification into the lucrative private secondary education segment.

Kong said there are few catalysts that would re-rate HELP at the moment but there could be a minor improvement in profit for 4Q, depending on student intake in September. He added that HELP could propose a capital exercise to raise funds to build its flagship campus at Subang 2, which would also make its shares more liquid. OSK Research has a fair value of RM1.99 for HELP.

As for Masterskill, Kong said the stock has been battered down due to late student intake and reduction of National Higher Education Fund  (PTPTN) loan approvals. About 95% of Masterskill students depend on PTPTN for funding.

“Masterskill has also seen some new competition in the healthcare education business. Just like HELP, Masterskill will need to diversify its offering,” he said.

OSK Research has a “trading buy” call on Masterskill with fair value of RM1.91.

Masterskill now has to contend with a new competitor in the form of KPJ Healthcare Bhd, Malaysia’s largest private hospital operator.

In July, KPJ’s education subsidiary, KPJ International College of Nursing and Health Sciences (KPJIUC), attained university college status, giving it a boost in academic standing and the ability to grant its own degrees. KPJ plans to invest RM120 million to expand its Nilai campus and aims to see a student enrolment of 10,000 by 2015.

Datin Siti Sa’diah Sheikh Bakir, KPJ managing director, has said the institution aims to acquire the status of a full-fledged university by 2016.

KPJ has a large infrastructure of hospitals, doctors and nursing staff which can support its courses, provide its students on-the-job training and give them future employment opportunities.

While Masterskill has no hospitals, it may have better economies of scale, with a revenue base about 10 times higher and a student base seven times larger than KPJIUC’s.

HELP has lost 40.5% from its 52-week high of RM2.84 to last Friday’s close of RM1.69, while Masterskill has fallen 66.3% from its year-high of RM3.49 to RM1.18 last Friday.

Among the education stocks, SEGi stands as both OSK Research and RHB Research’s top picks.

“In the education business, size does matter. SEGi currently has a very diversified offering and is focusing on the middle-income group that forms a large population here. There is also room to grow its student number from 25,000 currently to its full capacity of 30,000,” he said.

SEGi saw its net profit grow 78% to RM36.25 million for 1HFY11 ended June, on the back of RM137.7 million in revenue. Its share price, however, has fallen 19.2% from a recent high of RM2.08 in July to RM1.68 last Friday.

“SEGi is still our pick for the sector, due to its good track record and resilience in riding out market uncertainties. SEGi deservedly trades at a premium to its peers at 12.8 times FY12 PER (HELP at 12.6 and Masterskill 8.8 times), supported by its superior compound annual growth rate of 26.3% (HELP 7.7% and Masterskill -19.6%).

We continue to believe that SEGi is best poised to deliver growth going forward,” said RHB Research.

Apart from SEGi, OSK Research is also upbeat on Bursa Malaysia newcomer Prestariang Bhd, which offers ICT certification and distribution of software licences.

“Prestariang has a very secure business model with a good response to its courses by both graduates and undergraduates. Other stocks are expected to see gradual earnings growth, but Prestariang is expected to see its earnings grow by more than 50% for FY11,” said Kong, who added the counter has an attractive low single-digit valuation.

Listed on July 27, Prestariang posted RM12.99 million in net profit and RM45.99 million revenue for 1HFY11 ended June 30. However, its stock has since fallen 25.6% from its IPO price of 90 sen to Friday’s close of 67 sen.

Prestariang currently has an order book of RM280 million, with projects until 2015. It also counts international players such as Microsoft, Oracle, IBM and Autodesk as partners.

Alexander Chia of RHB Research said in the midst of waning global market sentiment, investors are more inclined to invest in defensive stocks.

“With a global recession looking possible next year, defensive stocks are in favour. In addition, investors looking to bottom fish to benefit from a near-term market bounce, would likely gravitate to higher beta issues that have seen a sharp selldown,” he said.

He added that although there is long-term growth potential for the education sector, HELP is a rather illiquid stock, which does not make it attractive for investors given the bearish market environment.

Although education is a non-cyclical sector, the headwinds faced by some players have been a drag on their performance and it remains to be seen when these will blow over.

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