Masterskill Education Group Bhd
(Oct 8, RM3.18)
Initiate coverage with buy call at RM3.18 and target price of RM4.90: A niche provider of nursing and allied health sciences education programmes, Masterskill is poised to take advantage of bullish industry dynamics.

With 35% of 500,000 students leaving secondary school each year pursuing higher education in local private institutions, there is a constant pool from which it can recruit students.

Additionally, strong demand for and shortage of job seekers with these qualifications is a natural pull factor for school leavers to enrol in these courses.

To tap growing demand, Masterskill is expanding and targets to increase its student population by 10% to 15% per year to 23,000 to 26,000 by FY12 (from 17,165 as at end-2009).

As the student base grows, the group will reap the benefits of economies of scale: for example there would be large savings in hostel/transport (34.5% of total costs) when its new main campus is completed in 4Q12.

It also benefits from direct payment of education fees by the government-backed National Higher Education Fund Corp (PTPTN), which means low payment delinquencies and predictable cash flows. For every ringgit of revenue generated, more than one-third is translated into operating cash flow, which would be used for capex and dividends.

Masterskill is undervalued at 11 times FY11 PER, below local peers’ average of 17 times. This is unjustified given its larger market cap and earnings base (3-year CAGR: 11%), as well as better margins and a healthy balance sheet.

Downside risk is cushioned by 4.4% net dividend yield (50% payout). The recent price weakness, triggered by talk of foreign selling, profit downgrades and expansion delays, is an opportunity to accumulate. — HwangDBS Vickers Research, Oct 8


This article appeared in The Edge Financial Daily, October 11, 2010.