This article first appeared in Corporate, The Edge Malaysia Weekly, on July 11 - 17, 2016.

IT has been more than a year since SMRT Holdings Bhd teamed up with private equity firm Creador to take a controlling 50.01% stake in loss-making Masterskill Education Group Bhd, now renamed Asiamet Education Group Bhd (AEG), in what should have been a straightforward turnaround to be completed in 12 months. 

But deteriorating macroeconomic conditions and legacy issues posed unexpected hurdles for the plan.

Over the 12 months ended March 31, AEG posted a net loss of RM21.4 million or 5.69 sen per share. Its share price closed at 25.5 sen last Friday.

“We said we were cautiously optimistic of a 12-month turnaround. But now, we understand that the challenges are much greater. We are more pragmatic now. It is going to take much longer now, maybe another 12 to 24 months,” says SMRT founder, chairman and chief executive Tan Sri Dr R Palan. 

SMRT holds 27% of AEG. 

Palan stresses that the short-term issues have been addressed. Masterskill University has already been rebranded as Asia Metropolitan University. However, branding and confidence building take time. Like it or not, the previous brand had been tarnished. 

The key to AEG’s turnaround ultimately lies in student recruitment, specifically in two high-value programmes — MBBS (medical) and pharmacy.

Walking around the university’s campus in Cheras, it is hard to ignore the emptiness. In its heyday, Masterskill churned out over 25,000 students over 10 years. Today, there are only about 800 students in the campus, which was designed for more than 3,000.

AEG executive director Subramanian Amamalay blames the tougher environment in private education for the slow growth in student intake.

“The current scenario is different from what it used to be. Even for the other private colleges, the intake for the first half of the year was down,” he says.

He cites several reasons, including government policies, higher entry requirements and stronger competition.

But these are not the only factors weighing on the university’s profitability. Subramanian points out that its most profitable programme, MBBS, has not been able to take in new students since mid-2015, in effect missing out an entire year’s intake. 

Preferring to label it as a “delay in intake”, he says it was due to non-compliance with certain requirements laid out by the Malaysian Qualifications Agency (MQA). 

“This was due to the history of the medical faculty. Originally, clinical studies were supposed to be done in Chettinad, India. (Pre-clinicals were to be done locally). Approval was given [by the government], but was later withdrawn by MMC (Malaysian Medical Council),” he explains during The Edge’s visit to the campus.

Hence, AEG was caught in a situation in which it could not provide the required clinical courses for its some 90 students. 

The group’s scramble to secure a teaching hospital and set up facilities and staffing resulted in teething problems, says Subramanian. 

The MBBS programme, which is currently being undertaken in Hospital Sultanah Fatimah Muar Johor, is under provisional accreditation, a process that all programmes must undergo before being fully accredited. Full accreditation can only be achieved when the first cohort graduates. Getting full accreditation is crucial for AEG as it will boost the public’s confidence in its medical programme. 

AEG’s first medical cohort was supposed to graduate earlier this year, but the programme has been extended to comply with MQA’s requirements. 

Among the issues the medical faculty faced was non-compliance with the minimum requirement of having two lecturers for each core placement. Subramanian argues that with barely 90 students per intake, one lecturer per placement would have been enough to comply with student-lecturer ratios.

Nonetheless, AEG has since complied with MQA’s requirements. According to Subramanian, the group is confident that the medical programme will be able to pass MQA’s extraordinary monitoring visit scheduled for late July.

The MBBS programme is considered a major income earner for the group. Even though it missed last year’s September intake and had to double the number of lecturers for some of the placements, Subramanian claims that the existing programme remains profitable. 

This is because the fee for the five-year programme is RM300,000. In contrast, the tuition fee for its pharmacy course is about RM130,000 and its diploma programmes cost only RM38,000. In terms of fee collection, one medical student is worth almost nine diploma students.

Currently, there are about 90 students in the medical faculty. AEG is supposed to have a quota of 80 students per intake but that quota has since been reduced to 50.

Hence, the upcoming visit by MQA could be a catalyst for the group. If it passes, it will be able to enrol medical students in September and, more importantly, pave the way for full accreditation.

If AEG can redeem its original quota of 80 students and fully utilise it, that will add RM4.8 million to its annual revenue. This alone will not be enough to bring it back to profitability, but it would certainly help to reduce losses.

Palan, a veteran in the education field, acknowledges that the business is a marathon, not a 100m dash. 

This means that major shareholders have to be patient to reap the fruits of their investments. 

However, will Creador and SMRT be able to wait that long?

SMRT took up a RM36.3 million loan to finance the RM51.9 million acquisition of its 27% stake in AEG. According to its latest annual report, the outstanding sum was about RM33.2 million as at Dec 31, 2015, and it had to pay bimonthly instalments of RM778,500. Annually, SMRT has to pay RM4.67 million to service the loan.

Meanwhile, Creador is under constant pressure to deliver returns for its stakeholders. Its investment in AEG is currently valued at an estimated loss of 42%, given that the private equity fund and SMRT paid 60 sen a share, which is now trading at 25 sen.

This takes into account the whopping 10 sen dividend that AEG paid out last year, or RM37.6 million in total. However, the generous dividend raised eyebrows, considering the group’s unstable financial footing.

Recall that the dividends were paid from the disposal of two properties for RM79.7 million to AEG’s former substantial shareholder, Siva Kumar M Jeyapalan, who sold 115 million shares to Creador and SMRT.

According to a circular to shareholders dated May 27, 2015, only RM20 million of the proceeds would be paid as dividends. However, AEG declared dividends of RM37.6 million.

Moving forward, paying out such dividends may prove challenging.

For the 12 months ended March 31, AEG suffered a net operational cash outflow of RM17 million. That averages to a monthly cash-burn rate of RM1.4 million. With only RM17.53 million of gross cash in hand, its cash pile should last for about a year.

As for operational cash flow, things do not look promising at the moment. However, AEG could sell its property assets to raise cash. “We still have six more properties to go. We have had some very good offers, but we feel that they are not commensurate with the valuations that we should be able to get. But that is an external environment issue,” says Palan, pointing out that AEG has a net tangible asset value of 38 sen per share.

“We are not desperate for cash, so we don’t want to do a fire sale,” he adds, noting that management is working on selling the properties in a timely manner.

Including those in Ipoh, Kota Baru and Kota Kinabalu, AEG’s properties are conservatively estimated to be worth RM110 million. That works out to 29.2 sen per share.

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