SMRT CEO reveals what he sees in ailing college group

MEGB has campuses in Kota Kinabalu, Kuching, Kota Baru, Johor Baru, Ipoh, Petaling Jaya and Kuala Lumpur.

WHEN education provider SMRT Holdings Bhd CEO Datuk R. Palan was asked why he bought into Masterskill Education Group Bhd (MEGB), he laughed and said everybody was asking him the same question.

“Well I saw an opportunity. If this was a profitable and roaring business, I doubt we would be able to acquire it at 60 sen per share.

“This deal is possible because the business is a stressed asset and the major shareholder wants to exit. We also happen to ‘live and breathe’ the (education) business and trust we can make it a success,” he says.

In what perhaps caught the market by surprise, private equity firm Creador and SMRT on Monday expressed an intent to make a buyout offer for MEGB at 60 sen per share.

Their offer is subject to a due diligence on the latter, which should end within a 30-day period.

In a joint statement, Creador and SMRT said they had received an undertaking from MEGB’s single largest shareholder, Siva Kumar Jeyapalan, who owns a 32.9% stake, that he would accept any offer for his block of shares.

Upon the announcement, shares of SMRT however reacted negatively. For the week, the stock is down 18.6% or 13.5 sen to 72.5 sen.

MEGB’s share price also dipped below 60 sen to close at 59 sen on Friday.

Asset-rich company

Palan is positive about the proposed buyout of MEGB because the latter has the backing of assets and cash to run the business, and has potential for additional revenue.

MEGB has campuses in Kota Kinabalu, Kuching, Kota Baru, Johor Baru, Ipoh, Petaling Jaya and Kuala Lumpur.

The plan is to nudge MEGB into an asset- light strategy and grow its education business.

MEGB has full university status and holds the potential of raising some RM220mil in cash, if all of MEGB’s existing properties are sold.

Via a deal announced two weeks ago, Siva Kumar has said that he is buying back four properties from MEGB for RM75mil and will lease it back to MEGB for its operations.

The properties are its campuses in Cheras, Kota Kinabalu, Kuching and Pasir Gudang. Out of the RM75mil, RM42mil will be used to repay existing bank borrowings, thus totally degearing MEGB.

Meanwhile, MEGB owns another four buildings that are not occupied.

The properties are the Kota Kinabalu Building, Kota Baru Building 1, Kota Baru Building 2 and its Petaling Jaya Building.

The total book value of these properties amounts to RM118.9mil.

It is learnt that MEGB’s asset-light strategy would continue irrespective of the offer for its shares from Palan and Creador because the buildings were not producing the required returns.

“The buildings were to cater for 14,000 students ... the business does not have that kind of numbers and that is why it is being divested,” says a banker.

MEGB’s existing building in Ipoh is presently being leased to Pelaburan Mara, with the latter given an option to buy it at RM43mil.

Furthermore, MEGB will recognise proceeds of RM33.2mil for an investment it made in April in Hong Kong-listed restaurant operator Gayety Holdings Ltd for RM19.9mil.

MEGB disposed off its entire stake in Gayety in August for RM33.2mil for which it made a gain of RM12.3mil. Part of the proceeds have been used for share buy-backs.

Thus, if the remaining four non-operating buildings are to be sold, combined with proceeds of RM33mil from the Gayety deal and the existing RM14mil in its bank, MEGB would have net cash of RM220mil.

MEGB would then be asset-light with zero gearing, with just the education business to run.

Thus, it is possible for the new owners to even consider a dividend payout, which would lower their entry cost into the company.

But if there was a future for MEGB, why is Siva Kumar planning to sell out?

In some ways, he is not entirely exiting because the properties he has proposed to purchase would be leased back to MEGB.

Real estate

An ex-investment banker, Siva Kumar says that the main reason why he is open to divesting his interest is because he feels he is not the appropriate person to run the business.

“I am not an (educationist) operator ... I don’t run operations. I have always maintained that I came in to clean up, restructure and sell (the company). I have always maintained that the value of the company lies in the real estate even if the business goes down”.

MEGB’s losses have come down substantially over the last two years. For the six months to June 30, 2014, MEGB’s losses have narrowed to RM9.8mil from RM30.4mil.

“A focused business plan and good execution will have Asia Metropolitan University (AMU) back in the black within the next several months if not by end of 2015. Change has happened over the last 24 months. MEGB is no longer a provider of nursing programmes. The organisation has transformed,” says Palan. (AMU is the university under MEGB.)

“Siva Kumar, a former banker has been prudent enough to do what is absolutely necessary for a successful turnaround. Doubtful debts have been written off. Assets have been revalued and impaired. All prudent steps have been taken to ensure it is a viable entity. It will be debt free and there is cash available to take the organisation forward. Furthermore, AMU has full university status,” says Palan.

“MEGB has fixed the cost problem. What is now required is the need to attract students, continuous programme and faculty development to fix the revenue side,” says Palan.

During its heyday five years ago, MEGB had about 14,000 students. Today, it has only 2,000 students, out of which 85 are medical students.

Palan says that for starters, AMU is allowed an intake of 80 students a year, and this hasn’t been utilised.

Secondly, he feels doubling the student intake by next year is very possible.

“There are great opportunities to grow AMU’s current regulated programmes such as medical and pharmacy and other unregulated courses such as management and marketing. With Malaysia being a magnet for foreign students, I believe AMU can achieve profitability and growth once the right professionals and guidance is put in place,” says Palan.

With SMRT and Creador coming in with a majority stake, it is quite possible that there could be some form of management contract between MEGB and SMRT, where the former will leverage on MEGB’s faculty, management skills and brands.

“As MEGB already owns the CUCMS, the faculty and educational skills can be replicated very quickly. Thus, on top of owning the stake in MEGB, SMRT could possibly be getting some sort of recurring income from the management it provides,” says one analyst who tracks the stock.

Nonetheless, Palan says the ultimate vision is to run focused boutique universities offering quality programmes.

“We will be the Malaysian brand with Malaysian talent that will traverse the region. We aim to be a bigger and significant player in the country and the region, one step at a time. We are excited with this opportunity,” he says.