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Monday, June 29, 2015

SMRT confident of 20% growth

KUALA LUMPUR: The rather sharp fall in first-quarter profits, which came after lower annual earnings achieved for the financial year ended Dec 31, 2014 (FY14), has exerted more selling pressure on SMRT Holdings Bhd ( Financial Dashboard)’s share price, which has tumbled 45% since the start of the year.

Prior to that, the education group’s share price took a beating last year, as its acquisition of a 23% equity stake in Masterskill Education Group Bhd (MEGB) ( Financial Dashboard) did not go down well with many shareholders.

Its chief executive officer Datuk Dr R Palan, however, is confident that SMRT will be able to chalk up a double-digit growth of 20% for this year.

“Without further expenditure incurred for corporate exercises, we expect our bottom line to grow in tandem with the top-line for this year,” Palan told The Edge Financial Daily in an interview.

Contributions from Cyberjaya University College of Medical Sciences (CUCMS), which the group acquired last year, is a key growth driver, he explained, adding that there is no acquisition plan this year. “It is a year of consolidation when we stabilise our businesses first.”

On top of that, the group has secured a contract to train English teachers for government schools.

SMRT’s (fundamental: 0.8; valuation: 1.5) net profit came in at barely RM789,000 for the first quarter ended March 31, 2015, down 39.5% from RM1.3 million for the previous corresponding quarter.

For FY14, SMRT’s net profit fell 14.85% to RM7.03 million from RM8.25 million a year ago, despite revenue having doubled to RM121.86 million from RM52.4 million for FY13.

Palan, who is also the executive director of MEGB, attributed the poor net profit to corporate exercises undertaken by the group, namely the acquisitions of CUCMS and MEGB. “We secured some borrowings to finance the acquisition of MEGB’s 23% stake,” Palan said.

The purchase consideration for the stake acquisition of MEGB (fundamental: 0.8; valuation: 0.3) was RM51.9 million, of which RM36.3 million was satisfied through external borrowings.

Because of the stake buy in MEGB, SMRT has to defer its plan to transfer to Bursa Malaysia’s Main Market, a move that would help to boost the valuation of its shares.

Palan is of the view that the recent downtrend in SMRT’s share price was mainly due to the general market sentiment. “The market sentiment has not been good lately, but I must say that SMRT’s fundamentals remain intact,” he said.

SMRT’s share price has been on a downhill since November, falling from 89.5 sen to 35 sen last Friday.

Palan acknowledges that SMRT is unlikely to pay any dividend for this year, as the group’s priority is to reduce its gearing by half this year. SMRT’s gearing ratio swelled to 0.28 times last year, after the purchase of a stake in MEGB, from 0.03 times in FY13. “Dividend policy is definitely in the pipeline. But we intend to lower the debt first before making dividend payouts,” he said.

On MEGB, Palan noted that the RM79.7 million received from the sale of two commercial buildings to its former substantial shareholder Siva Kumar M Jeyapalan will be more than enough to finance MEGB’s turnaround plan.

Out of the RM79.7 million proceeds obtained from the two property disposals, RM25.5 million will be used to repay borrowings, RM34.2 million for working capital, and the remaining RM20 million will be distributed as dividends to shareholders including SMRT.

“With these disposals, we can reduce MEGB’s current gearing of 0.2 times to 0.07 times,” said Palan.

In November, MEGB announced plans to dispose of some of the property assets of the education group, as part of its strategy to become an asset-light company and settle its debts.

However, Palan stressed that MEGB is in no hurry to dispose of the six remaining properties, which collectively have a fair value of close to RM200 million.

“Including the Petaling Jaya and Masai [properties], all eight properties belonging to MEGB have a collective fair value of RM274 million. We are now looking for buyers for the other [six]. They are now on open tender,” he said.

Moving forward, Palan said MEGB’s focus is to increase the student intake of its campuses, with the group allocating RM3.4 million to marketing expenses over the next 12 months.

Currently, MEGB operates two campuses in Cheras here and Johor Baru, which have been rebranded as Asia Metropolitan University. It houses 2,087 students, according to Palan.

MEGB’s share price closed 1.5 sen or 2.73% higher at 56.5 sen last Friday, with a market capitalisation of RM206.84 million.

The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Financial Daily, on June 29, 2015.

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