PP 7767/09/2010(025354)

Malaysia RHB Research

Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

New Listing 4 May 2010

MARKET DATELINE

Masterskill Education Group Offer Price : RM3.50*

Fair Value : RM3.88

Public Issue of 41.0m new shares, offering 205.0m shares in
*To be confirmed after institutional
total price.

Table 1: Investment Statistics Bloomberg: MASEG MK

Pre-tax Net EPS
FYE Turnover Profit Profit EPS Growth PER P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (RMm) (sen) (%) (x) (x) (%) (x) (%)
2009 273.4 112.3 97.4 23.8 35.2 16.3 3.5 33.3 Net Cash -
2010f 310.0 131.4 113.6 27.7 16.4 14.0 3.1 25.6 Net Cash 3.6
2011f 351.3 149.4 128.3 31.3 13.0 12.4 2.8 25.7 Net Cash 4.0
2012f 398.0 170.0 144.0 35.1 12.1 11.1 2.4 25.5 Net Cash 4.5
Valuations based on estimated fair value of RM3.88/share

Issued capital (m shares) 409.9 (RM0.20 par) Market capitalisation (RMm) 1,590.4

X Background. Masterskill Education Group (MEG) started in 1997 through

LISTING DETAILS
the incorporation of Masterskill Training Sdn Bhd with the intention of
Listing Sought : Bursa Malaysia
providing nursing and allied health education for the national and
Main Market
international healthcare industry. In Dec 2004, the Ministry of Higher
Education registered Masterskill College of Nursing and Health as a Private Listing Date : 18 May 2010
Higher Educational Institution.
X FY09-12 revenue CAGR of 13%. We estimate MEG’s FY09-12 revenue Public Issue : 41.0m new
shares including:
CAGR of 13.3%, driven mainly by: 1) Increasing demand for healthcare
-25.5m to
professionals and; 2) High student capacity. Malaysian Public
X Market leader with strong brand. MEG is currently the leading operator in and employees
the nursing and allied health education industry in Malaysia, with a total of -15.5m to
17,059 students enrolled in its diploma and degree programmes. From 2004- institutions
164.0m existing
2009, its total students enrolled grew at a CAGR of 140%. In February 2010,
shares including:
MEG’s market share among providers of nursing education in private higher -41.0m to
educational institutions was estimated at 22%. We believe that the strong Bumiputra and
growth in student intake is due to the company’s aggressive advertising and selected
marketing activities. For FY09, MEG spent RM11.4m or 4.2% of total revenue investors
-123.0m to
on advertising and marketing expenses.
institutions
X Risks. 1) Changes in requirements set by the governing bodies; 2)
Dependence on PTPTN Financial Aid by students. MAJOR SHAREHOLDERS
X Forecasts. The company is planning to build a new campus over the next
Masterskill Cayman Ltd…….…21.5%
two years at a cost of RM280m, although we note these plans are still at
Masterskill Holding Ltd…………22.1%
very early stages. We have thus not taken into account the potential positive
Dato’ Sri Edmund Santhara……2.2%
impact from the expansion plans which will likely only come through in FY13.
For FY10-13, we have assumed 14% and 13% p.a. growth for nursing and
allied healthcare intakes respectively, with no increase in average fee per
student. We have also assumed gross margins of 61% are maintained.
X Valuations. Our valuations are based on industry peers in educational
services within the region i.e. Raffles, HELP, Educomp and Everonn. We
arrive at a fair value of RM3.88 based on a target FY10 of 14x, assuming
MEG deserves to trade at a premium to HELP which has a smaller market
cap, but at a discount to regional and larger peers. The fair value represents
an upside of 10.9% to the IPO retail offer price of RM3.50. We believe the
Yap Huey Chiang
higher target PER vs. HELP is reasonable due to MEG’s position in both the (603) 92802641
healthcare and education sectors which are growing rapidly. yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.

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 4 May 2010

BUSINESS BACKGROUND

X Background. Masterskill Education Group (MEG) started in 1997 through the incorporation of Masterskill
Training Sdn Bhd with the intention of providing nursing and allied health education for the national and
international healthcare industry. In Dec 2004, the Ministry of Higher Education registered Masterskill College
of Nursing and Health as a Private Higher Educational Institution. It has provided services from its campus in
Cheras since Jun 2004, although we note it has expanded its student capacity from 1,000 to 15,000 over the
period and established four additional campuses located in Ipoh, Kota Kinabalu, Kota Bharu and Kuching. Its
total student capacity as at 31 Dec 2009 was 36,000 in total, with actual enrolment of 47.4%.

X Core business. 96% of FY09 revenue was generated from fees paid by students to enrol in its programmes.
Currently, MEG offers a total of nine degree programmes, eleven diploma programmes and one foundation
programme, in nursing, pharmaceutical and other allied health services. For FY09, 29.8% of its total
programme fees consisted of nursing education, while the rest were from allied health education.

X Market leader with strong brand. MEG is currently the leading operator in the nursing and allied health
education industry in Malaysia, with a total of 17,059 students enrolled in its diploma and degree
programmes. From 2004-2009, its total students enrolled grew at a CAGR of 140%. In Feb 2010, MEG’s
market share among providers of nursing education in private higher educational institutions was estimated
at 22%. We believe that the strong growth in student intake was due to the company’s aggressive
advertising and marketing activities. For FY09, MEG spent RM11.4m or 4.2% of total revenue on advertising
and marketing expenses.

X Quality education provider. MEG commits itself to train and develop quality healthcare professionals
through high-entry requirements for its applicants, intensive clinical training provided which is above the
requirement of the Nursing Board of Malaysia (60 weeks vs. 48 weeks) and qualified teaching staff. MEG
currently has access to 65 public hospitals, 131 health clinics, 37 district health departments, 10 welfare
departments and 122 private healthcare facilities for its clinical attachment programmes. Its teaching staff
are required to have at least a bachelors degree and relevant industry experience, while also encouraged to
pursue further studies.

X Strong financials. MEG boasts strong profit margins, with 45.2%, 41.1% and 35.6% for FY09 EBITDA, PBT
and PAT margins respectively. Its high margins reflect the company’s focus on cost control. We note that the
company would also be in a strong net cash position of RM197m after the IPO and before utilisation of
proceeds. This implies a net cash per share of 48.1 sen. After factoring in utilisation of IPO proceeds, the
company would still have net cash of RM56.5m or 13.8 sen per share.

X Dividends. Management has guided that MEG would adopt a stable dividend policy of 50-60% of net profit
beginning from FY10. We estimate a FY10 gross dividend of 13.5 sen a share, which translates to a yield of
3.6% based on our fair value.

BUSINESS OUTLOOK

X FY10-12 revenue CAGR of 13.3%. We estimate FY10-12 revenue growth for MEG’s revenue to be at
13.3% p.a. driven by :

1. Increasing demand for healthcare professional. According to MOH, the Government targets to
achieve a ratio of one nurse for every 200 population. The ratio is currently 1 for every 490 population.
The same goes for pharmacists and other allied healthcare professionals, with data showing a shortfall of
some 14,000 nurses against a national requirement of approximately 115,000. This indicates that MEG
has significant potential to increase its revenue. It augurs well for MEG that the Government recently
announced a moratorium on private nursing colleges beginning July of this year, thus limiting competition.

2. High student capacity. As mentioned, MEG’s total enrolment currently stands at only 47.4%. This
provides room for higher intake, and thus increasing revenues. However, management indicated that their
Ipoh campus will not be utilised to the maximum capacity of 12,500 as they plan to use a significant
portion of that campus as a disaster recovery centre. If the Ipoh campus utilisation and capacity are
removed from the total, current utilisation rate stands at 63.1% of available capacity. Nevertheless, MEG
plans to utilise part of the IPO proceeds to set up a new main campus with better facilities located in the
Klang Valley. The land has yet to be identified although construction is scheduled to commence in the
second half of 2010.

MASTERSKILL 2 EDUCATION GROUP

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 4 May 2010

Table 2. Campus Utilsation and Capacity

Utilisation
Student Rate
Campus Population Commencement Capacity %
Cheras 9667 June 2004 15000 64.4
Ipoh 2228 April 2008 12500 17.8
Kota
Kinabalu 3165 April 2008 3500 90.4
Kota
Bharu 1843 June 2008 2500 73.7
Kuching 156 January 2010 2500 6.2
Total 17059 36000 47.4
Source: IPO Prospectus

X Future plans. MEG plans to further grow its revenue base and net profit through :

1. More foreign students. The shortage of healthcare professionals in Malaysia is also shared by other
countries across the region. MEG indicated that for the next 2-3 years, its focus is to provide enough
places for students in Malaysia. However, it intends to attract students holding diplomas from Indonesia,
China and the Indian sub-continent to enrol in its degree programmes. Currently, foreign students make
up less than 2% of the total student population of MEG’s colleges.

2. Maximise auxiliary income. Auxiliary services for students such as entertainment, foods etc. are
currently provided by third-party vendors due to space constraints on-campus. As its student population
grows, MEG plans to provide these services on campus through rental and revenue-sharing agreements
with third party vendors. It also plans to increase occupancy rates in student hostels to accommodate
more students thus reducing fixed hostel costs per student.

X Risks. We believe MEG’s earnings are subject to the following risks:

1. Changes in ratio requirements set by the relevant bodies i.e MOH, the Nursing Board and
Malaysian Qualifications Agency (MQA). MEG’s colleges are subject to certain requirements set by the
governmental bodies such as bed-to-student ratio, teaching ratio, and student quota. The bed-to-student
ratio is the minimum number of beds provided to students undergoing clinical attachment. Thus, the
number of students who can undergo nursing clinical attachment is dependent on the number of hospital
beds made available. The MQA has specified a minimum ratio on the number of lecturers to students for
each class. Due to this, the number of students that MEG is able to recruit is dependent on its ability to
recruit more lecturers to ensure compliance with the ratio. The student quota is a quota set by the Nursing
Board and is the maximum number of students an institution can enrol each year based on the number of
teaching staff.

2. PTPTN financial aid. As at end FY09, 94.9% of students enrolled in MEG’s colleges financed their fees
through loans or scholarships from PTPTN (National Higher Education Fund Corporation). A change in
policy by the Government might impact the eligibility criteria for students to obtain the loans/scholarships.
MEG’s revenue might be impacted due to its students’ heavy reliance on financing their education through
the fund.

Table 3. Utilisation Of Proceeds From The Public Issue

RMm

Purchase of land and construction of buildings 115.0

Campus Expansion 20.0

Working capital 3.0

Estimated Listing Expenses 5.5

Total 143.5
Source: IPO Prospectus

MASTERSKILL 3 EDUCATION GROUP

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 4 May 2010

FORECASTS AND VALUATIONS

X Forecasts. The company is planning to build a new campus over the next two years at a cost of RM280m,
although we note these plans are still at very early stages. We have thus not taken into account the potential
positive impact from the expansion plans which will likely only come through in FY13. For FY10-13, we have
assumed 14% and 13% p.a. growth for nursing and allied healthcare intakes respectively, with no increase in
average fee per student. We have also assumed gross margins of 61% are maintained. Our FY10-12 EBITDA
margins remain stable at around 46.2-46.8%, guided by FY09’s margins.

X Valuations. Our valuations are based on industry peers in educational services within the region i.e. Raffles,
HELP, Educomp and Everonn. We arrive at a fair value of RM3.88 based on a target FY10 of 14x, assuming
MEG deserves to trade at a premium to HELP which has a smaller market cap, but at a discount to regional
and larger peers. The fair value represents an upside of 10.9% to the IPO retail offer price of RM3.50. We
believe the higher target PER vs. HELP is reasonable due to MEG’s position in both the healthcare and
education sectors which are growing rapidly.

Table 4. Peers Comparison

Company Mkt Cap (US$m) Bloomberg Ticker FY10 PER (x)
Raffles 707.8 RLS SP 17.62
HELP 68.7 HELP MK 12.4
Everonn 136.3 EEDU IN 15.55
Educomp 1467.6 EDSL IN 23.49
Peers Average 17.3
Source : Bloomberg Estimates

Table 5. Forecast and Valuations

FYE Dec (RMm) 2008 2009 2010F 2011F 2012F

Nursing 62.1 78.7 89.7 102.3 116.6

Allied Health 124.8 185.2 209.3 236.5 267.3
Registration, administrative and
others 17.3 18.1 20.6 23.3 26.5
Discounts -1.3 -8.7 -9.6 -10.9 -12.3

Revenue 202.9 273.4 310.0 351.3 398.0

Growth (%) 29.3 34.7 13.4 13.3 13.3

Gross Profit 125.2 171.0 189.1 214.3 242.8

Gross Margin (%) 61.7 62.6 61.0 61.0 61.0

EBITDA 89.9 123.6 143.4 164.4 186.0

EBITDA Margins (%) 44.3 45.2 46.2 46.8 46.7

Interest Expense -1.9 -1.3 -1.0 -1.0 -1.0

Interest Income 0.7 1.1 3.0 3.0 2.0

PBT 80.1 112.3 131.4 149.4 170.0

Tax -8.0 -14.9 -17.7 -21.1 -26.0
Effective Tax Rate -10.0 -13.3 -13.5 -14.1 -15.3

Net Profit 72.1 97.4 113.6 128.3 144.0

Source: Company Data, RHBRI Estimates and Forecasts

MASTERSKILL 4 EDUCATION GROUP

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MASTERSKILL 5 EDUCATION GROUP

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