Monday, April 23, 2012

Masterskill: At RM1.15 do you now think it is cheap?

Not everything is about value. Exactly, a year ago at its price of RM1.70, Masterskill (MEGB) was regarded as a buyable stock. I would not blame anyone who looked at value and if you considered at its promises on paying 50% - 60% of its income as dividend and a year ago's (FY2010) profit of RM102 million - ya, probably quite attractive.

The RM1.70 was already off by more than half its IPO price of RM3.50. And during then, most research houses provided a post valuation of more than RM3.80.
(See this - Masterskill riding on healthcare wave. - article as well.)

Now it is trading at RM1.15, valuing the company at RM471.37 million. Against its book value of RM516 million, the market value is trading at a discount of 8.7%. What failed them further?

As per above table you can look at the trend from its First to Fourth Quarter (I actually reversed it to show latest quarter first from left to right). What do you see? Huge negative trending!

Do you think it can reverse the trend fast? A definite no.

Masterskill's business is dependent on termed fees and most of its programmes are over a period of 3 to 4 years.  Hence, in a quarter of revenue, you will see a combination of its fees collection for students from first to fourth year. The fast and huge drop in revenue and profit within a year is in fact more than surprising.

This potentially could have meant that either a lot of the students have dropped out midway through the courses or they faced a lot of difficulties recruiting new students - or Both.

If you look at the fourth quarter results, we probably can guess that for its business to break even, they will need to achieve a revenue of RM50 to RM55 million a quarter.

From the IPO funds, Masterskill has gone on a spree of buying properties to build campuses and hostels for its students. After the purchases of the campuses, what do you think they need to do? They will need to fill up the campus. There are running costs to this. Hence, Masterskill's business model which is dependent on PTPTN's approval of loans to students will either have to change so that it is no longer dependent on the government loan or PTPTN will have to provide better support to Masterskill by increasing the students loan amount as it has done previously.

It will however be difficult to bet on the first point as the company was never built to address those challenges. The company was built to depend on government's assistance. It has never been built to pull students who depended on "FAMA's" (Father, Mother) funding.

Hence, for an investor of Masterskill and continuing to bet on Masterskill - you better hope that they get these reversal of decisions from PTPTN fast.

Serious Investing!

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