Under-performing stocks boost yields

Written by Insider Asia 
Friday, 25 March 2011 11:43

Recent selldown lowers valuations and raises yields for Masterskill
Another stock expected to offer investors higher-than-market average yield, driven by the sharp decline in its share price is Masterskill Education Group Bhd.

The stock has fallen well off its peak of RM4.25 last year, depressed by a confluence of factors. These include uncertainty over potential cutbacks in the National Higher Education Fund Corp (PTPTN) loan scheme, selldown by foreign investors as well as some delays in the opening of its new campuses. Still, despite its share price weakness, the company’s earnings have met market expectations. Revenue was up 15% to RM315.7 million in 2010 while net profit grew 5% to RM102.1 million or 24.9 sen per share.

Its outlook appears upbeat. The education industry, as a whole, is widely viewed as recession-proof and prospects for growth are good. The company, which offers a wide range of higher education and training services in nursing and health services, expects to maintain earnings growth on the back of campus expansion plans and rising student numbers. It recently secured approval for programmes for its new campuses in Kuching and Seri Alam, Johor, from the Higher Education Ministry. In a related development, the government recently indicated that repayments for study loans under the PTPTN have improved in the past three years. This bodes well for Masterskill. The national fund is in deep deficit, raising concerns on its future funding capability — which is the primary source of financing for the majority of students undertaking Masterskill courses.

Some of the measures undertaken include the transfer of loan collection responsibility to the Internal Revenue Department last May, so that repayments could be made through salary deductions. PTPTN is also developing a loan management system, to be completed next year, to further improve and enhance repayments.

Masterskill targets to pay out 50%-60% of net profit
Masterskill has a relatively generous dividend policy, with a target payout of 50%-60% of annual net profit. We estimate dividends to total 13.6 sen per share for the current year, assuming a 50% earnings payout. That would translate into an attractive net yield of 7.3% at the prevailing price of RM1.85.

Steady cashflow from operations and a strong balance sheet would support both the company’s expansion plans and dividend payout. Net cash totalled RM99.4 million at end-2010 or roughly 24.3 sen per share.

The recent selldown has driven Masterskill’s valuations lower — forward P/E estimated at just about 6.8 times — well below that of peers HELP International Corp Bhd and SEG International Bhd as well as the broader market’s average valuations.