Sasbadi earnings momentum expected to pick up going forward

This article first appeared in The Edge Financial Daily, on November 4, 2019.
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Sasbadi Holdings Bhd
(Nov 1, 17.5 sen)
Maintain hold with a lower target price (TP) of 17 sen:
Stripping off RM2.5 million impairment of its inventory and fixed assets, Sasbadi Holdings Bhd registered core losses of RM2.8 million for the fourth quarter of financial year 2019 (4QFY19). This brings its FY19 core earnings to RM6 million, which came in below our expectations.

The variance between the group’s core earnings and our estimate was mainly due to the lower-than-expected revenue contribution from its network marketing business (RM5 million for FY19 versus RM7 million for FY18), and the lower-than-expected profit margin due to lower revenue and an unfavourable product mix.

On the positive front, the revenue contribution from its print publishing division rose by 5% year-on-year to RM81.9 million in FY19 due to its better performance arising from higher revenue from new textbook contracts with the ministry of education (MoE) and contributions from sales of non-academic products.

We cut our FY20-21 earnings estimates by 26-30% to account for the reduction in our top-line growth assumption by 5%/8% for FY20/21 respectively, the reduction in our FY20/21 gross profit margin assumption to 47% (52% previously), and bookkeeping adjustments.

Despite the disappointing earnings reported, we believe that Sasbadi’s print publishing business may have hit a bottom in FY18-FY19 as we believe that it has fully reflected the adverse impact of the MoE’s restrictions on workbooks in school.

With the group’s effort to grow its non-academic print publication business and its digital products, coupled with better contributions from new textbook contracts, we do expect the group’s earnings momentum to pick up going forward.

Post-earnings revisions, we maintain our “hold” recommendation on Sasbadi with a lower TP of 17 sen, pegged at an unchanged calendar year 2020 price-earnings target of nine times. Despite our expectations that the group’s earnings will pick up in FY20-21, we believe that the stock is fairly valued at this juncture. — AllianceDBS Research, Nov 1