Written by InsiderAsia
Thursday, 01 April 2010 15:41
HELP International Corp (RM2.03) posted another sterling set of results for 1QFYOct 2010. Earnings at the education company continue to expand at a double-digit clip, underscoring its resilience and strong branding. Margins also expanded significantly, thanks to rising demand for home-grown degrees and financial prudence measures during the recession.
For 1QFY10, revenue rose 12.7% year-on-year (y-o-y) to RM23.5 million. Pre-tax profit increased by a robust significant 63.4% y-o-y to RM3.8 million. Net profit doubled to RM2.4 million, accounting for 13% of our full-year forecast of RM18.5 million. This is within expectations as its earnings are seasonal. As a comparison, 1QFY09's earnings accounted for 8% of the full year's total.
HELP's earnings are highly seasonal as it recognises revenue and profits according to the classes conducted for each student enrolled, rather than on a pro-rated basis across the year. As such, its earnings are traditionally weak for the first and third quarters for its October financial year (Nov-Jan and May-Jul) due to the year-end and mid-year holidays. Earnings are very strong in the second and fourth quarters (Feb-Apr and Aug-Oct) when classes are in full swing.
The growth in turnover reflects increasing student enrolments and staggered fee increases. Profits and margins increased more significantly due to a higher proportion of students studying for home-grown degrees, ie those awarded under the "HELP University College" banner, which reduced payments to external universities. Pre-tax margin expanded from 11% to 16% y-o-y.
HELP's balance sheet remains very strong. Despite paying an initial deposit of RM5 million for the purchase of the HELP Residence hostel, its net cash position remained virtually unchanged over the last quarter.
Net cash stood at RM87.2 million in Jan 2010. This is equivalent to a significant 98 sen per share — or 48% of the current share price of RM2.03. The sum includes RM30.8 million for fees paid in advance, but excludes the RM20.3 million allocated for the purchase of land for its new campus in Subang 2, Sungei Buloh.
Strategic road map in place
HELP is on track for continued double-digit growth in FY2010-2011. The company's net profit has grown a compounded 24% annually over the last four years and looks set to grow 20% annually in the next two years. The company has a clearly mapped-out growth strategy over the next few years, which culminates in the settling up of its new flagship Subang 2 campus.
In the near-to-medium term, growth will be anchored by growing student numbers — both locally and abroad, the staggered impact of fee increases and the addition of its Fraser Business Park campus. It will also enjoy substantial cost savings from the recently proposed acquisition of HELP Residence, which will be fully realised in FY2011 (the acquisition is pending completion).
Recall that in Dec 2009, HELP had proposed to buy the HELP Residence building in Damansara Heights, which is presently used as its hostel, for RM50 million cash, to be paid over a period of five years, with interest accrued at 4%pa on the unpaid balance. This works out to RM329 psf.
The acquisition is positive earnings-wise, as savings from rental will far outweigh interest costs. The current annual rental of RM4.127 million for the hostel translates into a rental yield of 8.25% for the vendor, as opposed to interest income of just 2% and the imputed interest rate of 4% for the staggered instalment payments. Thus, HELP could potentially save up to RM3.125 million a year in FY2011, which is equivalent to 14% of its pre-tax profit base in FY2009.
The longer-term growth strategy will focus on the 23.3-acre Subang 2 integrated campus. This will elevate HELP into a full-fledged university, from its present status as a University College granted since 2004. The new campus will also serve as a regional centre for its rising overseas student population. This includes those coming to Malaysia to study full-time, as well as those studying overseas for its degrees, most of which the last year is typically spent in Malaysia.
In addition to HELP's current student population of about 12,000 in Malaysia, it has over 1,000 students studying for HELP accredited courses overseas, in Vietnam, China and Indonesia. The majority are students enrolled in Vietnam National University.
The overseas ventures involve a "twinning" like arrangements with low risks and entry costs, but high international visibility and earnings potential. HELP provides software, syllabus, training, technical and academic support, without heavy investment in buildings or physical assets.
HELP is expanding its overseas base further, and is in the process of setting up new affiliations with a number of colleges this year, including four in Indonesia, 23 in China, one in Cambodia and likely another one in Vietnam, all of which will see students studying for HELP-accredited or twinning degrees.
With these new tie-ups, the company should see a significant increase in overseas income from FY2011 onwards. It expects to see about 500-600 new overseas-based students in FY2010 and 1,200-1,600 the following year — in addition to the current base of over 1,000 students.
Thus, the new Subang 2 campus will alleviate accommodation and space constraints at its present Damansara campus, and allow for HELP to become a major regional education player.
Underlying resilience
The rising — and very prohibitive — cost of overseas degrees, and HELP's strong branding and academic standing will continue to increase its student base and ability to increase fees in the future, especially for twinning degrees. This underscores the resilience of its earnings.
HELP has a strong business model and brand name. The strong branding has helped to expand its student population base, extend its presence overseas and increase the appeal of its own home-grown degrees, which are gaining popularity — not just locally but also abroad.
Robust earnings growth, attractive valuations
We expect net profit to rise 20% to RM18.5 million in FY10 and 21% to RM22.4 million in FY11, with earnings per share of 20.8 sen and 25.2 sen, respectively.
At RM2.03, HELP's price-to-earnings valuations are low at just 9.7 and 8 times for FY10-11 earnings. These valuations are very attractive for a company with strong fundamentals, balance sheet and branding, solid growth prospects and relatively resilient earnings.
Its latest NTA of RM1.11 per share is also severely understated. The company's main fixed asset, the 11-storey Wisma HELP in Damansara Heights, is carried in its books at only RM32 million — or just RM119 psf for the built-up space.
If we place a conservative value of RM350 psf for Wisma HELP — still well below prices of RM520-RM700 for newer buildings in the Mont'Kiara, Bangsar and Damansara Heights areas, we would arrive at a value of RM94.2 million for the building.
Thus, the value of the building and cash alone would total RM181.4 million — or RM2.05 per share, around the current share price. This implies that investors are getting HELP's other assets, including the underlying business, valuable franchises and strong branding built up for the past 24 years, for effectively "free".
New campuses to anchor expansion
HELP's expansion will be anchored by two new campuses — Fraser Business Park and Subang 2.
Due to delays in handover, the new campus at Fraser Business Park on Jalan Sungei Besi, Kuala Lumpur, will open in the fourth quarter of 2010 instead of May 2010. HELP will lease about 220,000 sq ft of space, which can accommodate up to 5,000 students. The campus will cater largely for post-graduate, technical and vocational courses, including a wide range of new courses such as culinary, hospitality, performing arts, physiotherapy and others.
HELP-ICT (the former Sepang Institute of TECHNOLOGY [] acquired in Nov 2007) will also move from its Klang location to the Fraser Park campus. This will give the new campus an instant base of about 1,500 students and will further widen the appeal of HELP-ICT's engineering, vocational and medical courses, as they were previously limited by its location in Klang.
The longer-term expansion plans will centre on the flagship Subang 2 campus near Sungei Buloh. Located on 23.3 acres, the land was acquired for just RM20 psf or RM20.3 million. The entire campus is expected to cost around RM100 million, including land cost. HELP hopes to receive building approvals this year and start building next year. The first phase, with 300,000 sq ft of built-up space will cost RM50 million. This can be easily funded through annual cash flows.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
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