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Monday, November 24, 2014

SMRT - TP RM1.40 / MEGB - TP RM1.18 (by CIMB Head of Research)


SMRT Holdings Bhd   |  PDF
MEGB’s white knight
Mkt.Cap:US$58.83m  | Avg.Daily Vol:US$0.61m  | Free Float:58.00%
Education  | Author(s): Terence WONG, CFA +60 (3) 2261 9088,
▊ SMRT’s acquisition of Masterskill (MEGB) will transform it from a single campus university to one with a national footprint, with vast potential for synergistic benefits. It is buying MEGB for free as the sale of the latter’s property assets will turn it into a pure cash company We organised a briefing for SMRT to meet with institutional clients to explain its rationale for buying into troubled MEGB. Contrary to investors perception that MEGB remains a debt-ridden company, it is well on its way to becoming a cash-rich and asset-light company. Our analysis suggests that SMRT is being paid 4 sen to acquire MEGB. At MEGB’s current share price of 74 sen, SMRT’s valuation rises by 6 sen to RM1.10-1.44.

Acquisition of MEGB
On 10 Nov, SMRT, together with Creador LLC, offered to acquire MEGB’s Executive Chairman, Siva Kumar 32.9% stake at 60 sen/share. As Creador already owns a 19% stake, the offer will trigger a mandatory general offer (MGO) at 60 sen/share.

MEGB to turn cash-rich
The briefing addressed the rationale for the acquisition of MEGB and investors concerns about the health science education industry. SMRT’s management dispelled the notion that MEGB was still saddled by debt and that it was still a nursing college. Significant restructuring efforts through the sale of its property assets in the past 18 months are starting to bear fruit and MEGB is well on its way to unlocking the value of its property assets that could realise net cash of 64sen/share, implying that SMRT-Creador is being paid 4 sen by MEGB for the acquisition. We believe that a special dividend could be in the offing 1-2 years down the road.

Turning MEGB around
MEGB’s medical and pharmacy student quota have hardly been taken up given its negative brand imaging. CUCMS, on the other hand, has 5-7x more applications then spaces available, which implies major synergistic opportunities. In addition, cross-sharing of faculty staff and resources should lower MEGB’s operating cost in the long term. We estimate that MEGB could trade up to 94 sen next year and RM1.18 in 2016.

Enter Creador
Creador has an excellent track record of making quick high-return investments. Its promise to underwrite the balance of MEGB’s MGO take-up (SMRT will only hold 20-25% of MEGB) signals its confidence in SMRT’s ability to turn around the company.

Previous [ SMRT Holdings Bhd ] reports...
30/10/14  Co.Note NR  Oh my English!  (RM0.74)

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