Education companies are generally known for their defensive qualities, with earnings that are relatively recession-proof due to rising demand for education, the importance society places on quality education, and the increasingly prohibitive cost of obtaining overseas degrees. The expense of a foreign education favours companies providing “twinning” degrees or local alternatives, and allows room for fee hikes.
But Masterskill found itself enduring a rough ride this year after battling issues such as share price volatility (due to a high percentage of its shares being owned by foreigners), and the looming prospects of shrinking government loans for its students. The stock is now trading at near its lowest levels of the year after several sell-downs that do not appear to reflect its strong balance sheet and earnings.
Its shares closed at a record-low of RM2.04 yesterday, down 42% from its IPO price of RM3.50, and a steep 52% from its high of RM4.25.
Although the IPO price was considered on the high side, the stock got off to a good start, helped in part by a rally in other education stocks such as HELP International Corp Bhd and SEG International Bhd. For a few months after its listing in May, Masterskill actually performed relatively well, reaching its high of RM4.25 on Aug 5.
The first sign of trouble appeared in September, when the counter plunged a total of 89 sen, or 23%, within six trading days. During that time no material announcements were made, which left investors puzzled.
Back then CEO Datuk Seri Edmund Santhara explained that part of the reason for the plunge was the disposal of shares by one of its foreign investors, which dragged the stock down.
Furthermore, the group faced delays in the full opening of two of its campuses in Johor and Kuching. However, Santhara maintained that the targets and plans for the year were still on course despite slight bureaucratic delays.
Since then, all approvals from various bodies have been obtained for the Kuching campus and it is up and running. The company’s expansion plans are still on track, with its Kota Bharu campus set to open in January next year. The Kota Kinabalu campus is being developed and is slated to open by end-2011. The group has also been buying up land in Kajang to develop a university college.
As luck would have it, the group took a second beating in November. Over two weeks, the counter lost 84 sen to close at RM2.06 on Nov 16. By then, another issue had cropped up in the form of a threat to the stability of payments received from student under the National Higher Education Loan Fund (PTPTN) scheme.
The 2009 Auditor-General’s Report highlighted that the PTPTN scheme could be facing a deficit of RM46 billion at the end of the 11th Malaysia Plan in 2016. There were also concerns that the stock could see overhang pressures once the six-month moratorium on selling by its pre-IPO investors ended in November.
As a nursing and allied health education provider, Masterskill enjoys the benefit of incoming students that rely heavily on government loans. Through this, the group enjoys a healthy Ebitda margin in the mid-40% range that is significantly higher than its peers. The group is said to rely on the PTPTN scheme to provide financing for more than 90% of its students, with some estimates rising to as high as 95%.
Santhara recently told The Edge Financial Daily that this is a common feature of the health science education landscape. Other colleges that offer these disciplines also typically see a high reliance on PTPTN loans. Thus, the group is not the only player facing a threat.
It is a well-known fact that the PTPTN faces problems with its loans as many loan recipients tend to become delinquent in paying their instalments.
However, recent developments could change investors’ doubts about Masterskill. On Monday it was reported that the Inland Revenue Board (IRB) is expected to implement an automatic salary deduction scheme for PTPTN loans beginning Jan 1, 2012. This is a practice already common in developed countries such as Australia, and ensures the government is repaid.
In order to do this, laws will have to be amended and these could be tabled in parliament by June next year, according to IRB director-general and CEO Tan Sri Hasmah Abdullah.
In an analyst briefing last month, Masterskill’s management had assured that the effect of the PTPTN issue was minimal at present. The PTPTN is also proposing that it only fund tuition fees of up to RM45,000 per student for a three-year diploma course, compared with as much as RM60,000 currently.
This will only apply to new campuses with new programmes, such as Masterskill’s Kuching campus. The group has appealed against this decision.
CIMB Research said in a Nov 24 report, “This suggests a deficit of RM7,000 per student based on Masterskill’s average course fee of RM53,000. There are about 400 students at the Kuching campus, which translates into a total deficit of RM2.8 million. Management stressed that this amount would not impact the bottomline immediately as diploma programmes span three years. PTPTN pays Masterskill twice a year.
“Management is looking into some options to make up for the potential revenue shortfall, such as creating an internal loan scheme for students. We note that the 400 students at the Kuching campus make up only 2% of the group’s total student numbers.”
In a follow-up note on Nov 29, the research house added that Masterskill’s management believes the new scheme will not impact enrolment, but margins instead. Financially, it said the group’s earnings were still intact.
For the nine-month period ended Sept 30, the group registered a 17.9% year-on-year increase in revenue to RM234.8 million from RM199.1 million a year ago due to an increased student intake. Pre-tax profit was up 8.4% y-o-y to RM91.98 million, while net profit increased 9.5% to RM75.3 million, or 18.4 sen per share based on its expanded share base. Its Ebitda margin stands at a high 43.3% year-to-date.
The group also has healthy gross cash of around RM277.06 million and low debts of RM47.96 million. Its net cash is sizable at RM229.1 million, or 56 sen per share, appears comfortable for its expansion plans.
Masterskill has paid out seven sen in dividends so far. For the first half of this year, this gives an implied payout ratio that is relatively high at 58.4% of net profit, with a gross yield of 3.4% so far. The group’s number of active students stands at 17,613, up from 16,801 a year ago. Foreign shareholders had a sizable stake of around 61% in the group as at Nov 18.
At yesterday’s closing price of RM2.04, the stock is trading at a PER of around 8.7 times, according to Bloomberg consensus estimates.
CIMB Research has forecast net profit of RM103.7 million for this year and RM118.9 million for 2011, with earnings per share of 25.3 sen and 29 sen, respectively. Based on these forecasts, the stock is trading at 8.1 times for this year and 7.1 times for 2011. CIMB Research is maintaining its “outperform” call on the stock, and its target price of RM4.73, which is pegged to the research house’s target market PER of 13.8 times for 2012.
Masterskill and JCY International Bhd are the local bourse’s two worst performing IPOs this year, each down about 45% from their IPO price. But unlike JCY, which reported an unexpected final-quarter loss and lower full-year earnings for FY2010 that were only half of analysts’ earlier forecasts, Masterskill’s financial performance has remained steady.
Santhara says the shares’ current level is an ideal price for local buyers and institutional funds to make an entry. “We are actively in touch with analysts from both local and foreign fund houses that are keeping a keen interest in our company. Ideally we would like a better spread from both local and foreign funds, but at the moment interest from foreign funds is stronger. We believe they recognise the potential of our industry and sector, and understand the foundation of our business model,” he said.
With relatively resilient earnings and low valuations caused by the major sell-down, perhaps the group can count on a better year in 2011.
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