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Saturday, November 15, 2014

MEGB and SMRT

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For now, you guys should know that Creador headed by Brahmal Vasudevan, aka hand of midas, has partnered with SMRT to acquire Masterskill at RM0.60 per share. However, they have expressed their interest to remain the listing status of MEGB, so be rest assured, MEGB will be trading close to RM0.60 for the next 3 months except SMRT decides to abandon the deal.

My take: Creador has already bought into MEGB and they have no option to not take up the shares, but SMRT has the option, should they decided to cancle the deal after due diligence. But wait, Brahmal is also SMRT’s shareholder right? So, what are the chances this deal will fell through? I would say 1%? Even if the deal fails, Creador will have to stuck with MEGB too, just that with SMRT, it makes it easier for Creador to turnaround MEGB.

TP: RM1.00

Current price: RM0.615

Market cap: RM250m

Upside: 63%

(A) Company Background

You could find a lot of information on how a huge IPO advised by Goldman Sach and CIMB went down the drain last 3 years from the web. I shall focus on some important information here.

-MEGB used to be no.1 in population in Health Sciences programme

-MEGB has more than 14 international partners, with 5 of them from China.

-MEGB offers 2 foundations and 9 diploma programmes according to their site. Currently, they have about 4,000 students

-Currently, MEGB operates in 4 campuses, Cheras, Kuching, KK and their PJ Campus’s opening is still delayed. They have recently sold the land in Bangi and according to Q2 2014 announcement, by July 2014, they will close down the Ipoh campus and by Sep 2014, they will close down the Kota Bahru and JB campuses and all of them will be moved to Cheras.

-The group recently decided to embark a different business model, by using an asset light model, which they will dispose most of their campuses' property (RM176m here) back to Mr Siva and public and lease it back for ten years. Why this is a good move? The company no longer need to recognise huge depreciation expenses, but it replaces it with rental expenses and this would free up cash for the company!

How could SMRT work with MEGB?

(i) MEGB focused more in their foundation and diploma courses, with more than 80% of its students intake were from these categories. CUCMS focused more in degree courses and some of the diploma courses that MEGB does not offer, eg, Diploma in Psychology? Students that passed the Diploma courses in MEGB could further pursue their degree in CUCMS.

(ii) MEGB owns 4 campuses (Cheras, Kota Kinabalu, Kuching and PJ with capacity of 15,000 students) while CUCMS is renting on only one campus in Cyberjaya (capacity of 5,000 students). According to insiders, CUCMS has oversupply of students, and these students could be parked in MEGB’s campuses or via other type of collaboration.

(iii) MEGB and CUCMS are able to work together and cross sell their programmes. Marketing efforts and costs could be saved.

(iv) CUCMS is able to leverage on MEGB’s infrastructure while MEGB is able to leverage on SMRT’s experienced management team together with Creador headed by Brahmal aka the midas hand.

(v) With SMRT focusing on Middle East and MEGB focusing on China and other parts of the world, both of them are expected to have more international students in the future, therefore, margins could be expanded

(vi) According to CIMB, SMRT/CUCMS has an oversupply of medical students from AUCMS and EGYPT, if a 5-year medical course cost RM275k, with 440 potential medical students, that will be extra RM24m of revenue for CUCMS. SMRT is able to leverage on MEGB’s quota to achieve this.

(B) Shareholders
Siva Kumar – 32.9%

Raphia Limited (A vehicle from Creador – Brahmal Vasudevan) – 16.2%

Free float – 50%

Masterskill has started to buy back their own shares, after Mr Siva has decided to terminate his put/call option with Gary How, and up to date, the company has actually bought 33.8m shares from open market, suspected to be a sell down by previous shareholders, How and other previous substantial shareholders has also resigned from the board. From here, the actual outstanding shares of the company have actually reduced from 409m to 375m, which is a good sign.

Post due diligence, Creador will be the single largest shareholder in Masterskill with potentially 26.1% shares and SMRT being the second largest at 23%, after you deduct the treasury shares.

(C) Financial analysis



Commentary:

When Masterskill was listed, it hits a PAT of RM103m with 19,000 students! And now it has only 4,000 students. However, Mr Siva actually highlighted that if they add another 2,000 students, they will be in a profitable position, and recently, MEGB has also come up with additional 6 new courses, and to breakeven on Q4 2014 is very much likely. In order for MEGB to reach RM100m revenue in FY2016, it will probably need more international students and higher tuition fees courses, which I think SMRT is able to offer.

Why there will be profits for Q3 2014 and possibly after that?

On 28 March 2014, MEGB has bought 4% interest in Gayety Holdings at HKD0.40, and within 6 months, it has surged more than 100%, and MEGB has realised their RM12m gains from here, and this will be reflected in their books on Q3 2014, therefore an additional 3cents to their NTA, if they cancle their treasury shares. The 3 campuses will also be closed down in Q3 2014, saving RM4m worth of profits on an half-yearly basis, making it RM8m profits.




Gearing

Masterskills still has RM176m land and buildings that will be sold to Mr Siva and public, and another assuming MEGB is able to dispose all these properties and with the RM30m capital with gains, that would boost up their cash value to RM200m. After paying off their RM41m debt, they will be left nearly RM160m net cash, about RM0.42 per share! And what? You are buying RM0.18 for MEGB's business!

(D) Valuation

As mentioned above, after the proposed disposal, MEGB will be an asset light company without much assets in their books! My TP is just RM1.00 in 12 months time, that will value MEGB's business at RM0.58, while the rest are net cash RM0.42!

With all the synergies listed above and whatever you could think of, MEGB might be able to turnaround and possibly exceeds their FY2013’s revenue levels in FY2016. Using CUCMS' margin (20%) as a guide, if Masterskill is able to hit RM100m worth of revenue, a mere 15% PAT margin is sufficient to register a PAT of RM15m, therefore, rerate the company above RM1.00, make sense?CUCMS has only 2,000 students, half of MEGB, and they are expected to make RM10m next year, so RM15m for MEGB is not a huge number.

RM15m x P/E of 15x = RM225m

MEGB' business value = RM225m/375m of shares = RM0.60

RM0.60 + RM0.42 (net cash after disposal) = RM1.02!!

(E) Technical analysis

Masterskills used to be trading at RM4, it was a nightmare for IPO shareholders back then, but at current level, it reminds me of KNM last year, when they suddenly a show of profit on their quarter books after their cost cutting exercises, propelled KNM from RM0.40 to RM1.10 in a year. No research houses were covering KNM when they were 40cents and when it doubles, suddenly those analysts are back to track the stock again. I hope the same thing will be happening to MEGB soon.




After the announcement, MEGB attempted to breakout from its resistance zone, but it failed to do so, I believe it will take 2-3 days for people to search for the answer for this M&A. I am very confident Masterskill will attempt to cross this zone and move very swiftly to breakout from its “double bottom” and hence, if you replicate that target price, it could potentially reach RM1.00.




S1: RM0.585, S2: RM0.53


R1: RM0.65, R2: RM0.715, R3: RM0.80

(F) Risk reward ratio

(i) Upside return of 63% - Turnaround is for sure, how much Masterskill could generate is the question, for me, RM20m in FY2016 is no problem to them.

(ii) Downside risk of 5% at RM0.585 – Mandatory General Offer will surely take off if SMRT has completed its due diligence on MEGB, therefore the floor pricing is RM0.60 because that is the cash they will offer to pay off the shareholders of MEGB if they do not like this deal. However, most of the companies that did MGO went above its MGO price when new shareholders appears, I shall give you some examples here, Maica aka Sunsuria, HCK, TMClife, etc.

I am very confident that MEGB would be able to hit RM0.80 easily, but to reach RM1, probably need to wait more than 6 months

R/R ratio: 9 times.

(G) Rerating factors/ Catalysts

(i) The one off profits – RM12m from sale of Gayety shares to be reflected in Q3 2014

(ii) Ceasing operations in 3 smaller campuses which will save more than RM2m profits per quarter!

(iii) Creador/Brahmal factor – Look at GHLsystem, triple up since they acquired

(iv)No research house covers this stock yet because everyone dislike the naughty Siva and Edmund, the "overpromised" ex-CEO or hates MEGB for their “con-act” IPO?

(v) Students injection from SMRT/ Experienced management from SMRT to be on MEGB’s board soon

(vi) All the synergies I could think of mentioned above

(vii) At RM0.60, you are buying a business at RM0.18 with RM0.42 net cash!

Cheers. If MEGB surged, your next stock pick should automatically be SMRT, because they are buying at RM0.60, and there will be potential gains from their investment. There will be alot of synergies that SMRT could leverage on, but generally, the market seems to be negative on this news due to the previous sucky management of MEGB and its previous dodgy owner, but they probably do not know, MEGB might show profits in Q3 and possibly, Q4 2014! SMRT will also be rerated further, I mean now below RM0.80 is a no brainer, right? And if the acquisition succeeds, maybe SMRT would eventually swallow MEGB in 2-3 years time, and hits RM2, who knows?And one more thing that people worry on SMRT is because they do not have cash to buy that 23% stake in MEGB, but haha, after MEGB disposed all their property, they could pay their shareholders back, possibly RM0.30 per share! What SMRT needs is probably only 6-12 months bridging loan facilities at the moment, and rights issue is very unlikely!

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