MEGB: Hanging By A Thread

After tumbling down from its high of RM4.30 soon after IPO, Masterskill (MEGB) is currently hanging by a thread - from another free fall off the cliff.

We know that a lot of issues have affected Masterskill for the past one year: tightening of PTPTN funding, heavy selling by foreign funds, fierce competition in health education & increased entry requirement for nursing course etc. This week, Masterskill's share price closes at RM1.08, extremely close to its historical low of RM1.06, and now it is just a week before it announces its earning of 2011Q4 to conclude a disappointing year.

Last quarter, Masterskill said that the delay in the schedule of new student intake from June to September has affected its financial performance. Its net profit is only at RM5.5mil in 2011Q3, a massive drop compared to RM26mil in 2010Q3 and RM12mil in 2011Q2. Now, could the September intake give a little boost to its 2011Q4 earning, at least?

 

Year	Active Student
2007	8718
2008	13500
2009	17165
2010	18399
Sep 2011	14250

From Masterskill's active student count chart, if the new student intake has been delayed from June to September, then we can expect a better result for 2011Q4. However, increased administrative cost has played a major part in the drop of its net profit. The increase in degree programmes offered and the start up cost for MBBS will not come cheap.

Anyway, it is predicted that the forthcoming result will not be a very good one. The question is, could it be worse than the street's expectation. If it is, then we can expect a new low for its share price, which may easily break its psychological support at RM1.

     New Bangi University Campus

Earlier this year, Masterskill has announced that it has obtained approval to acquire a 6-storey building in section 19 Petaling Jaya, probably for its business, law, media and hospitality programmes. Besides, it has also received approval from the ministry of higher education to run a new post grad certificate in teaching methodology in its Cheras campus. (Err.. not a popular programme I guess). Masterskill has added more than 10 new programmes in 2011.

MEGB financial results:

RM mil	2010		2011
	Rev	Profit	Rev	Profit
Q1	77	27	74	23
Q2	77	22	66	12
Q3	81	26	61	5.5
Q4	81	27	?	?

I would expect a net profit of RM6-10mil for its 4th quarter. If it is the case, perhaps the worst of Masterskill has passed and I can reconsider buying its shares?

MEGB: A Bad Surprise

When you invest in a company which has the largest market share or leader of something, you may feel that you are making a right decision. But look at Masterskill.

Masterskill is the largest operator of nursing courses in Malaysia. It is listed in Bursa in May 2010 with an IPO price of RM3.50. However, its share price has since drops to RM1.18 now (66% down), after the announcement of the disappointing 2011Q2 financial results. Don't forget that Masterskill as a small cap, has an EPS of 25sen, ROE of 25%, Net profit of over RM100mil and dividend of 14.9sen or yield of around 8% in 2010.

RM mil	2010		2011
	Rev	Profit	Rev	Profit
Q1	77	27	74	23
Q2	77	22	66	12
Q3	81	26
Q4	81	27

For 2011Q2, the revenue falls 11% QoQ and 14% YoY, while the net profit falls 48% QoQ and YoY. This set of results caught many by surprise and as a result, the target price has been cut, cut, and cut. 

Is Masterskill still worth investing in? Is it the start of the decline that takes years to recover or no chance to recover? Is it a temporary dip that provide a chance to buy at low?

Before this, negative news such as reduction in stake by foreign funds, rumours about PTPTN loan and CEO's health concern have significantly dragged the share price down to below RM2.

Lets see what are the reasons for this current poor results. From the management briefing, the reasons are:

• Low student intake (3200 in 1H10 to 1800 in 1H11)
• Delay in announcement of SPM (pre-U) exam results
• PTPTN loan cut from RM60k to RM45k
• 95% of Masterskill students depend on PTPTN loan
• Average course fee is RM52k
• Raised requirement for nursing diploma (from 3 credits to 5 credits)
• New schedule of student intake of public universities delayed from previously June to September
•  Students delay their decision to join private college/university
• Delay in approval of nursing diploma at Kuching campus

• Higher operating cost
• To improve lecturer/student ratio
• Perhaps the new MBBS (medical) degree

• Higher depreciation
• Greater expansion plan

Will all the factors above cause permanent damage to Masterskill? Or are they only temporary due to some "cultural shock" caused by the change in various policies that result in lower student intake?

     Future Bangi flagship campus

Lets look at other listed educational stocks in Bursa: Segi and Help.

FY2010 results

RM mil	Rev	Profit
MEGB	316	102
HELP	105	19
SEGI	218	43

From this FY2010 results of Masterskill, Segi and Help, we can see that Masterskill has the larger revenue and profit by a considerable margin, even though it only operates in health-related programmes such as Nursing and other allied health courses. The management has since included medical degree in mid-2011 and has the plan to diversify its courses especially into business-related programmes. If it is successful, surely it will have positive impact on masterskill.

FYI, both Segi and Help have a variety of programmes esp for Segi which offers Education, Business, Law, Accounting, Economics, Engineering, Computing, IT, Arts, Communication, Tourism, Language, Medical, Dentistry, Pharmacy, Nursing, Optometry etc.

A bit of positive/negative notes on Masterskill

• Work with Australia's University of Newcastle to introduce business programme
• Plan to get a college building in Petaling Jaya for its business, law, media & hospitality programmes in Apr12
• Plan to expand to Indonesia/Indian subcontinent (but still no clear plan)
• CEO collapsed and undergone life-threatening brain aneurysm surgery in Nov 2010 and has been out of management in the subsequent 4 months.
• Delay in completion of Bangi flagship campus (from end 2012 to end 2013)
• Started medical degree MBBS in June 2011 at Seri Alam campus
• Increased quota for its medical degree from 50 to 100 students
• Internal loan to help students after loan cut in PTPTN
• Masterskill now only operates in health-related education programmes and it has a large room for expansion
 

     CEO with a big scar on his head

The subsequent 2011Q3 result is expected to be like or even worse than Q2, before improvement expected in Q4 after the new student intake.

If the management of Masterskill is really good, then I can see its large potential of growth by expanding its business into non-health related programmes and overseas (which are already inside their plan). Even though education business is said to be recession proof, there are definitely lots of competition in the country at the moment.

Masterskill's major direct competitor should be Mahsa (not publicly-listed), which also offers health-related programmes which include not only nursing & medical, but also pharmacy & dentistry. Anyone knows how is Mahsa doing?

OSK	1.91
CIMB	1.71
RHB	2.10

  MEGB latest target price

MEGB: Technical

Technically speaking, MEGB has a rather strong support level at RM2.00. Currently this level also act as a support for 100day moving average. The RSI below 30%, sign of oversold. If you are risk taker, then it's a good indicator to buy. However, at today's lunch break, MEGB already breached pass this support level to RM1.95. If this selling trend is unchanged in the afternoon session, then I think the sign of trend reversal may be is still not there and it may drop further. But if buying interest pour in in the afternoon and it closes at or very near RM2, it will form a hammer and the reversal probability is even higher (hammer at support level). To reduce the risk, one may wait to see next trading day's trend and decide whether to buy or not at the end of next trading day.

Masterskill: Buy?

One of the stock I hold is Masterskill. Its share price already down almost 10% in one week, probably due to its Q1 result which is 15% lower QoQ. At this moment the price is still diving, at the moment RM2.02. Sweating....

Should I just hold or accumulate at low? Today CIMB still give a buy call with target price at RM4.48! MEGB start to operate new campus recently in Kuching & JB, which will increase its student count. It will soon start its new course - MBBS in which there will be no more new competitor for this course for years to come, and it just ventures into Indonesia as well. I think the future is still promising for MEGB and expects better earning from subsequent quarters. It gives me a feeling that it's business is expanding: new campus, new courses, new partners.

With the "recession proof" feature of health industry, relatively low PE, good dividend yield and its earning potential, if i have more bullets, I'll consider to accumulate at its support level of RM2 or when there's sign or reversal.