Written by Siow Chen Ming
Tuesday, 07 June 2011 10:55
KUALA LUMPUR: The “KDU” brand college and private school have been around for many years, but not many would be aware that they form the education division of developer Paramount Corp Bhd, and make a sizeable contribution to the group’s earnings.
Paramount’s education arm, comprising KDU University College, KDU College and Sri KDU private school, produced a pre-tax profit of RM23.2 million for FY10 ended December, on revenue of RM97.6 million. That made up about 20% of the group’s FY10 core pre-tax profit of RM116.3 million (excluding a one-off gain of RM60.8 million from the disposal of a 20% stake in Jerneh Insurance Bhd).
Applying a price-earnings ratio (PER) of around 15 times, below peers such as HELP International Corp Bhd and SEG International Bhd (SEGi), Paramount’s education arm, if listed, could be worth about RM260 million, said market observers.
The KDU brand is easily recognised in the education industry.
They see the possibility of a listing a few years down the road to unlock value for Paramount, whose market value stood at about RM683 million on June 6, based on a share price of RM5.66.
Paramount’s stock is trading just slightly above its net assets per share of RM5.42 as at March 31, but less than 10 times historical PER for its core earnings.
Indeed, the valuation of HELP may be a good gauge of how much Paramount’s education division could potentially be worth.
HELP has a market capitalisation of RM373.6 million and is trading at a trailing PER of 17.2 times and 15.9 times forward PER. For FY10 ended October, HELP posted a pre-tax profit of RM26.68 million on a revenue of RM105.2 million.
This makes HELP about 15% larger than Paramount’s education unit in terms of pre-tax profit and 8% bigger in terms of revenue.
If Paramount’s education unit is priced at a 15% discount to HELP in terms of market capitalisation, the unit, if listed, could be worth around RM317 million. This is equivalent to 46% of Paramount’s current market capitalisation, even though the education unit accounts for only 20% of core earnings.
Ong says a new RM400 million campus for KDU University College is under construction.
Paramount’s education business has fared well with pre-tax profit coming in steadily at above RM20 million a year between FY07 and FY10. Currently, the division is on a new expansion drive which could potentially see earnings reaching a much higher level from FY14/FY15 onwards.
Paramount CEO and managing director Ong Keng Siew told The Edge Financial Daily that the expansion is for both the tertiary and private school units, explaining that a new RM400 million campus for KDU University College is under construction while the group is also starting its new international school programme this September.
However, the fruit from these efforts will only come a few years later. Due to the capital cost incurred for the construction of the new campus over the next few years, earnings from the tertiary education unit will drop and offset any increase in contribution from the private school.
“Overall, the performance from the education division will not have many surprises until FY14/FY15 after the new KDU University College campus is completed,” said Ong.
The new KDU University College campus will be built in Glenmarie, Selangor,on land acquired from The Titular Superior of the Brothers of Saint Gabriel. Phase one of the campus will be completed in 2014, at a cost of RM250 million, to cater for 5,000 students. Phase two, to be implemented at a later stage at a cost of RM150 million, will further increase student capacity at Glenmarie to 9,000.
The new campus, if fully utilised, will more than double KDU’s current student capacity (at its university college and college) of more than 5,100. There are currently three KDU branches — one in Penang and two in the Klang Valley (Section 13 and Damansara Jaya, Petaling Jaya). The Section 13 facility for KDU University College will be relocated to Glenmarie while the Damansara Jaya and Penang facilities will remain for KDU College.
Ong said the high capital investment is required for the new campus in order to meet student preference for a nicer campus environment. “Such an investment is needed to increase our capacity and also to provide better facilities to remain competitive. Competition is intense in the tertiary segment.”
It was the planned RM400 million investment in the new campus that spurred speculation about Paramount floating its education division to raise fresh capital. However, management declined to comment, citing Bursa Malaysia’s strict disclosure requirement.
Given the strong appetite for education stocks and the valuations accorded to HELP and SEGi, analysts said floating the education unit makes sense.
Education stocks were among last year’s best performers as investors warmed up to their growth prospects and defensive qualities. The sector is widely viewed as “recession proof” due to the strong underlying demand for quality education and the large cost differential between degrees obtained wholly overseas and “twinning” degrees done locally.
Student numbers are also set to increase at Sri KDU, which currently has more than 2,200 students, with the addition of an international school to be opened in September. The international school, which will offer secondary school programmes based on the British curriculum, has attracted over 500 registrants, said Ong, who described such enrolment numbers as “encouraging”.
The international school will be situated next to the current Sri KDU private school in Kota Damansara.
“There is a huge market potential in the private school segment. This segment is not as competitive as the tertiary segment. There are fewer players in this segment and the demand for private schooling is increasing,” said Ong.
Management said there are plans to open a third private school, but the group has yet to decide on the location, cost and capacity.
The group owns a 4ha plot of freehold land in Pulai, Iskandar Malaysia, which it has earmarked for its education division. However, there are no immediate plans for this piece of land.
Paramount’s education division has come a long way from FY05 when it posted an operating loss of RM3.1 million before turning around in FY06 with an operating profit of RM10.3 million.
It is surprising that as a developer, the group has committed to growing its education division over the years, instead of developing for immediate profit its valuable landbank in Penang, Damansara Jaya and Kota Damansara.
The RM400 million investment in the Glenmarie campus further entrenches Paramount’s commitment to education. Together with the expansion of its private school it is set to grow the group’s education division beyond its current annual pre-tax profit of over RM20 million.
This article appeared in The Edge Financial Daily, June 7, 2011.
