SEG International Bhd
(Jan 3, RM1.19)
Unrated with a fair value of RM1.16: We are issuing a “not-rated” call on SEG International Bhd (SEGi) with a fair value of RM1.16, with a price-earnings ratio (PER) of 26.9 times (from 99 sen). SEGi has been struggling in the past two years as student enrolment rates tumbled about 17.4%.

During a recent meeting, management guided us on its upcoming plans. However, we remain cautious about our financial year 2016 (FY16) and FY17 forecasts as we believe improvements will not be seen immediately.

Third quarter of FY16 (3QFY16) revenue increased by 10% to RM71 million, leading to a 308% boost in profit before tax (PBT) to RM14.1 million (from RM3.5 million in 2QFY16), recording the strongest PBT level in the past two years.

This could be attributed to the opening of new intakes, hence a slight increase in its student base. No dividend was declared for the quarter, in line with historical trends, but FY16 was still a challenging year.

Its cumulative nine months of FY16 (9MFY16) total revenue of RM200.1 million increased marginally by 3% (versus 9MFY15 revenue of RM193.8 million), and despite recording strong PBT in 3QFY16, 9MFY16’s PBT of RM22.9 million tumbled by 15.2% from 9MFY15’s PBT of RM27 million due to poor enrolment rates.

Earlier this year, management expected its student base to increase from 23,000 to 26,000.

However, the results were disappointing as growth in the number of local students remained sluggish, possibly due to a rise in living costs and competition. Nevertheless, the increase in enrolment of foreign students cushioned the negative impact from the lack of enrolment of local students.

With an aim to increase the number of international students from 5,000 to 10,000 (+100%) by FY17, SEGi intends to recruit more agents worldwide, while also leveraging on its close ties with the Chinese embassy to attract more students from China.

While we see potential for expansion in its international student base, we remain conservative on the matter and have adopted more conservative growth assumptions in our forecasts. At the same time, SEGi also intends to raise facility fees on top of additional administration fees for international students.

In the meantime, SEGi is also in the midst of applying to enter the QS World University Rankings table. Should the plan materialise, this could potentially polish its brand name and provide a competitive advantage against its competitors. However, this undertaking could incur additional expenses, dampening net earnings in the near term.

Going forward, we anticipate stronger growth in enrolment of international students, but lower contributions from local students, as we believe a meaningful recovery would only be in sight with a turnaround in market sentiment. For FY16/FY17, we project growth rates of -10%/+2.7% for local students and +11%/+20% for international students. With the expected 5% rise in facility fees imposed on international students, we foresee a 5.3%/12% jump in revenue, translating into a revenue of RM266.7 million/RM299.4 million.

Despite heavier marketing expenses and agent commissions, we believe the company will be able to maintain its earnings before interest and tax margin at 10.5% for FY16 and FY17, hence our core net profit estimates of RM27 million/RM30.2 million (+13.1%/+11.9% year-on-year).

We have revised our ascribed PER from 22 times to 26.9 times as we believe the previous valuation may be obsolete.

Our revised valuation is based on -1 standard deviation over its historical five-year average forward PER, which we believe is fair as we are cautious about the growth prospect of local student intake following poor market conditions, though slightly mitigated by growth potential in the international student market. — Kenanga Research, Jan 3