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This article first appeared in The Edge Malaysia Weekly, on February 1 - 7, 2016.

The plan to list ILMU Education Group, which houses Ekuiti Nasional Bhd’s (Ekuinas) education portfolio, is likely to be scrapped as stock market conditions are not favourable for an outright listing.

Market talk has it that Ekuinas, a government-owned private equity (PE) firm, is mulling over divesting the portfolio piecemeal, starting with the disposal of APIIT Education Group. Ekuinas currently owns a 51% stake in APIIT. It bought the stake from Sapura Resources Bhd, which still holds the remaining 49%.

“Ekuinas does not seem to be able to get the right timing for the listing of ILMU. They missed the opportunity in 2014 and early 2015, before the stock market started to fall,” says a banker based in Singapore who was awaiting the listing.

When contacted, Ekuinas says it does not comment on speculation of its investment and divestment activities. Nevertheless, it says it is open to divesting ILMU through a listing or a strategic sale.

“The group aims to continue growing its range of offerings. Any plans to divest ILMU will only be finalised once Ekuinas believes that the value of the investment has been optimised,” it says.

Ekuinas first invested in the education industry in February 2011 when it acquired a 51% stake in APIIT for RM102 million and 90% of Cosmopoint Group for RM246 million. This was followed by the acquisition of 90% of UNITAR International University for 

RM58.5 million in May 2012.

The PE firm continued its acquisition trail in December 2013, buying a 76.5% stake in Asia Pacific Institute of Information Technology Sri Lanka (APIIT Lanka) for RM32.3 million. The stakes in APIIT and APIIT Lanka were bought from Sapura Resources.

APIIT owns and operates the Asia Pacific University of Technology and Innovation, Asia Pacific International School and Asia Pacific Smart School in Malaysia while APIIT Lanka is a higher education institute in Sri Lanka.

According to Ekuinas, as at financial year ended Dec 31, 2014 (FY2014), it had invested RM496.8 million in the education portfolio. The firm’s 2014 annual report states that ILMU generated RM317.4 million in revenue during the year, a 7% increase year on year.

It also states that ILMU’s earnings before interest, taxes, depreciation and amortisation in 2014 was RM88.7 million, an increase of 3.7% y-o-y. The group had 30,514 students across its portfolio, a growth of 6.1% y-o-y.

However, the annual report does not state whether ILMU was profitable after deducting for tax and minority interests.


Selling back APIIT to Sapura?

“There is talk that Ekuinas is talking with Sapura Resources about its 51% stake in APIIT,” says an executive familiar with the investment. “However, pricing is an issue. Even if Sapura Resources wants to buy back the stake, it won’t do so at a high price. At the same time, Ekuinas will want to make a divestment gain if it were to sell back the stake.”

The fact that Ekuinas does not own 100% of APIIT limits its ability to expand the education group, as any capital injection will need the support of Sapura Resources. This is more so now as Sapura Resources is venturing into property development.

An executive with Sapura Group confirms that talks are being held between Ekuinas and the major shareholders of Sapura Resources on APIIT. However, he says the Shamsuddin family like to keep their cards close to their chests.

Interestingly, there is also talk that Sapura Resources wants to exit the education business completely by selling its 49% stake to Ekuinas.

However, the stake in APIIT is the key earnings contributor to Sapura Resources. The company’s aviation service business at Subang Skypark and Senai International Airport remained loss-making as at Oct 31, 2015, while its property development joint venture is still in its infancy.

For the nine-month period ended Oct 31, 2015 (9MFY2016), Sapura Resources’ aviation service business posted a pre-tax loss of close to RM2 million while its property investment business contributed a profit before tax of RM8.74 million.

On a net of tax basis, Sapura Resources was in the red in 9MFY2016, with a net loss of RM548,000, compared with a net profit of RM20.1 million in the previous corresponding period.

This is because in the third quarter of 2014, Sapura Resources booked a RM14.3 million gain on investment from the purchase of a 50% stake in a 1.88-acre parcel of commercial freehold land in Jalan Kia Peng, Kuala Lumpur, in a joint venture with KLCC Holdings Sdn Bhd.

The plan was to develop an office tower, retail podium and convention centre with a total gross floor area of 1.19 million sq ft. The JV company, Impian Bebas Sdn Bhd, has secured RM1.08 billion funding for the project, which will have a gross development cost of RM1.5 billion, according to Kenanga Research in a Nov 16, 2015, report.

With the funding for the KLCC project secured, Sapura Resources has seen its earnings eroded due to an increase in finance costs. In 9MFY2016, its finance costs ballooned to RM6.52 million from RM119,000 in the previous corresponding period.

During the same period, Sapura Resources’ loss before tax and contributions from its associates and joint ventures was higher, at RM11.9 million, compared with RM8.5 million previously, despite its operating loss narrowing to RM5.35 million from RM8.33 million.

Thus, it is possible for Sapura Resources to buy back the 51% stake in APIIT for better earnings contribution. Kenanga Research estimates that the 49% stake in APIIT contributes RM20 million per annum to Sapura Resources’ pre-tax earnings.

According to Kenanga Research, based on a 15 times forward price-to-earnings ratio, Sapura Resources’ stake in APIIT could be valued at RM294 million. Based on the same metrics, Ekuinas’ stake in APIIT could be valued at RM306 million, triple the amount it paid for the stake back in 2011.

Will Sapura Resources or anyone pay that amount to Ekuinas for the stake in APIIT?

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