Can Brahmal turn Masterskill around with SMRT?

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IN THE PAST, the emergence of private equity firm Creador and its CEO Brahmal Vasudevan in a listed company has always excited the market and grabbed the headlines. However, the firm’s recent move to acquire a substantial stake in Masterskill Education Group Bhd (fundamental: 1.2; valuation: 0.6) has raised the question as to whether or not Brahmal can turn around the loss-making higher education provider.

Last week, Creador and education services provider SMRT Holdings Bhd said they planned to rescue the ailing MEGB after raising their investment in it to 50.02%, triggering a mandatory general offer for the remaining 49.98% stake.

Previously, Creador had invested in OldTown Bhd, Bonia Corp Bhd and GHL Systems Bhd while Brahmal had taken personal stakes in Glomac Bhd, Mudajaya Group Bhd, My E.G. Services Bhd, IFCA MSC Bhd and SMRT (fundamental: 1.5; valuation: 1.8).

The shares of these companies jumped despite the absence of significant corporate developments. In fact, MyEG rose 149% in less than a year while IFCA MSC climbed 41% within a week (see table below).

Masterskill_table_28_1050

On average, these counters gained 80% after Creador or Brahmal emerged as an investor in them.

But now, investors may be wondering if MEGB will benefit from the Creador and Brahmal effect.

MEGB’s financial woes began in 2010 after a drastic drop in student enrolment, triggered by a reduction in the PTPTN (Perbadanan Tabung Pendidikan Tinggi Nasional) maximum loan amount as well as higher minimum entry requirements.

Indeed, Brahmal is seen as a savvy investor with a nose for undervalued stocks and a proven track record. But it is worth noting that unlike MEGB, OldTown, Glomac and Mudajaya were not (and are not) in financial distress when he emerged as an investor. In fact, all the eight companies that Creador or Brahmal invested in were profitable.

In contrast, MEGB recorded a net loss of RM166.97 million and RM28.188 million in the financial years ended Dec 31, 2013 and 2012 respectively. It remained in the red for the nine months ended Sept 30, 2014, registering a net loss of RM3.379 million, down from RM134.8 million a year ago.

Moreover, as strategic investors, Brahmal and Creador are not directly involved in the management of the investee companies.

Nevertheless, Brahmal, who is the founder of Creador, tells The Edge that he is confident that the firm and SMRT will bring all the ingredients needed to revive Asia Metropolitan University (AMU) as a leading institution in the country.

For rebranding purposes, MEGB will be renamed Asiamet Education Group Bhd.

“We have a joint plan to run the organisation with SMRT overseeing the management of the company. There are plans to appoint a new president or chief executive at the university level,” says Brahmal.

When contacted, SMRT CEO and chairman Datuk Dr R Palan tells The Edge that Creador will look at corporate matters and SMRT will handle the business side. “Creador is not into operations; it creates value at the strategic level while SMRT will look at the operations through the management team. Both Brahmal and I will provide the strategic input.”

Palan reiterates that MEGB, which has been loss-making in the past two years, has set a target to break even within a year. Besides the rebranding exercise, the group also aims to improve student intake and bring in a new academic team.

“The plans are being worked out at the moment; we do not lull ourselves into thinking this will be easy to turn around or it will happen overnight. There is a lot of hard work ahead,” Palan admits.

To recap, last Monday, Creador and SMRT signed a share sale agreement (SSA) with MEGB executive director Siva Kumar M Jeyapalan to buy his 30.75% stake in the education group at RM69.39 million or 60 sen apiece.

Under the SSA, SMRT will take a 23% stake in MEGB while Creador will take up 7.75%. The private equity firm, which had on Jan 8 bought a 19.26% stake, will now have a 27.02% stake in the company.

Creador and SMRT have spent RM112.86 million on the 50.02% stake in MEGB. They are required to make a takeover offer of 60 sen per share for the remaining 49.98% stake, but any acceptance in the GO will be taken by Creador.

The offer price represents a price-to-book value (P/BV) of 0.96 times compared with net assets value per share of 62.4 sen. As this is only a technical GO — the offerors intend to maintain the listing status of MEGB — the unattractive offer price is very much expected.

On the GO, Brahmal says the offer price is fair as it is based on the acquisition price from Siva Kumar.

“We are giving them [the minorities] an option to either accept the offer or join the growth of the company by holding on to their shares,” he stresses.

Masterskill_28_1050Many investors got their fingers burnt buying into MEGB’s pricey IPO at RM3.80. The counter has not traded above the IPO price after the listing. It closed at 69 sen last Thursday, up 89% from a year ago.

Meanwhile, the managing director of a local education group, who does not want to be named, comments that MEGB has to rebrand itself and drop its legacy. Yet, a name change may not be sufficient.

“Being asset-light doesn’t mean people will believe you to provide quality education. MEGB has to work on the fundamentals. If I were the CEO of the company, I would want to diversify into other programmes,” he says.

A research analyst with a local investment bank points out that the takeover of MEGB is only technical and that the minorities should not accept the offer. At the current market price, they might as well sell their shares on the open market, he says.

The analyst, however, advises that if the minority shareholders believe in the track record of Creador and Brahmal, they should stick to MEGB. “Brahmal and Creador always target to triple the money [investment cost] within three to five years.”

Interestingly, the MEGB investment is the first time Creador has invested directly in a local listed company. Previously, it invested in Bonia through Milingtonia Ltd, OldTown through Neobalano Carpus Ltd and GHL Systems through Cycas.


Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

 

This article first appeared in The Edge Malaysia Weekly, on January 19 - 25 , 2015.