SMRT HOLDINGS BHD chairman and CEO Datuk Dr R Palan believes that together with Creador II LLC, it will be able to turn ailing Masterskill Education Group Bhd (MEGB) around.
“We want to make sure students get a quality education. It’s got a good reach, a total of six campuses. So far we have been KL-centric, it will be nice to be Malaysia-centric … it’s possible to turn it around, it’s salvageable,” he tells The Edge.
Last Monday, education provider SMRT announced the proposed acquisition of a 32.9% equity interest in MEGB belonging to its substantial shareholder and executive director Siva Kumar Jeyapalan at 60 sen apiece. According to the announcement, the acquisition will be done together with Rahpia Ltd, a wholly-owned subsidiary of Creador. SMRT will take up a maximum of 23% interest in MEGB while Rahpia will acquire the remainder of Siva’s stake.
Rahpia is an existing shareholder of MEGB with a 16.26% stake while Creador founder Vasudevan Brahmal holds a 6.15% stake in SMRT.
If it proceeds with an offer after completing due diligence on MEGB’s books, Creador will have a 26.16% stake in MEGB if SMRT takes up the maximum 23%. With a combined interest of 49.16%, SMRT and Creador would then have to extend the offer to the remaining shareholders of MEGB at 60 sen apiece. They intend to keep MEGB listed, if a mandatory general offer materialises.
News of the proposed acquisition caused SMRT’s share price to slide throughout the week. As at last Thursday, its share price shed a total of 13.95% from 86 sen to 74 sen.
It is no surprise that the market did not react positively to the news given MEGB’s loss-making position since its fourth quarter ended Dec 31, 2011. Nevertheless, Palan remains convinced that the company’s operations are salvageable. He admits, however, that the negative public perception towards MEGB will be the biggest hurdle for the company to overcome.
“I think the biggest issue is perception. Why do we think that it is salvageable despite all the baggage? Over the last 18 months, there have been a lot of cleaning up and financial restructuring. The balance sheet is a lot better now than people think,” Palan says.
As at June 30, MEGB had cash and cash equivalents of RM14.32 million while total borrowings stood at RM42.15 million. In recent times, it is seen adopting an asset-light strategy, opting for a sale-and-leaseback model for its properties.
This is the second time SMRT acquires an ailing education provider. Earlier this year, it acquired a 70% stake in Cyberjaya University College of Medical Science (CUCMS), paying some RM27.5 million. The opportunity came when the previous management of CUCMS faced financial difficulties after having to bear the cost of transferring more than half of its medical students to other universities because it exceeded the annual quota of 150 students set by the Ministry of Higher Education (MOHE). Consequently, MOHE slashed its annual quota to 100 students from 150 previously.
SMRT recently announced that it had completed the acquisition of the remaining 30% stake in CUCMS, making it a wholly-owned entity of the listed company.
If the deal materialises, SMRT aims to improve MEGB’s performance by returning it to a profitable state. Palan believes this can be done through quality programmes, faculty management and governance. It will scrutinise the accounts to see if there are any other costs that need to be rationalised to restore margins to a decent level.
Palan says part of the outcome of this proposed acquisition is to address the issue of employability of MEGB graduates. He believes SMRT and Creador will not be starting from ground zero as the current management of Asia Metropolitan University (rebranded from Masterskill University College in 2012) has been working on action plans to improve its graduates’ employability.
“You either fix it, sell it or close it. I don’t think we are at the ‘close it’ or ‘sell it’ stage. I think we are at the ‘fix it’ stage for Masterskill,” Palan says, quoting Jack Welch, former chairman and CEO of General Electric.
Currently, Asia Metropolitan University is no longer a nursing college but offers other degrees such as medical, pharmacy and allied sciences.
But with only a maximum stake of 23%, Palan says SMRT will play the role of supporting the running of MEGB’s operations, akin to an advisory role to Creador — which will be the major shareholder — due to SMRT’s experience in the tertiary education landscape.
He says SMRT’s decision to have a maximum of 23% interest in MEGB is because it does not want to take on more risk than it can handle and be overgeared.
“When you take on risk, it’s better to take on risk that you can handle. We don’t want to be overgeared as well; we want to be prudent. That’s why we decided on a significant minority stake.”
As at June 30, SMRT had total borrowings of RM18.56 million — close to three times its cash pile of RM6.4 million. A back-of-the-envelope calculation shows that SMRT would have to fork out some RM51.9 million for the 23% stake at 60 sen apiece.
SMRT recorded an 87.7% increase in its net profit, from RM2.11 million to RM3.9 million, for the six months ended June 30. It had a revenue of RM53.1 million for the first half of financial year 2014 compared with RM22.74 million previously. The increase came from the addition to its education segment, which contributed about 40% to the bottom line.
Only time will tell if SMRT and Creador can turn MEGB around. For now, SMRT investors seem to think otherwise, as the counter continued to slide to its Friday close of 72.5 sen for a market capitalisation of RM160.5 million.
This article first appeared in The Edge Malaysia Weekly, on November 17 - 23, 2014.
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