How to add value to Masterskill - Investing | The Star Online


How to add value to Masterskill

Masterskill saw its net loss widened to RM166.97mil in the financial year ended Dec 31, 2013, compared with a net loss of RM28.19mil in the previous corresponding period.

Masterskill saw its net loss widened to RM166.97mil in the financial year ended Dec 31, 2013, compared with a net loss of RM28.19mil in the previous corresponding period.

In a surprise turn of events, Masterskill Education Group Bhd (MEGB) made headlines earlier this week when it announced that little-known Hong Kong businessman Gary How Soong Khong has proposed to buy a 29.76% stake in the company from the major shareholder.

A loss-making one at that.

The nursing and allied health education provider, which had been in the red in its two previous financial years, saw its net loss widened to RM166.97mil in the financial year ended Dec 31, 2013, compared with a net loss of RM28.19mil in the previous corresponding period.

THE question that comes to the minds of most is why would How, a Malaysian but based in Hong Kong, take up a stake in a company that is lagging in the competitive education industry? Also, he is prepared to pay a premium to the market price.

According to executives close to How, he has several businesses is in Hong Kong ranging from property development to the food industry.

“He feels that MEGB can be turned around quite easily by bringing in students from China to do their courses here,” says the executive. Having a stake in the group would allow him to enjoy the upside.”

On Thursday, MEGB announced that its major shareholder, Siva Kumar M Jeyapalan, who is also the company’s executive director, had entered into a put-and-call option with How to dispose of his entire stake in the education group for RM1.10 per share, which is a premium of 104% from its closing price of 54 sen yesterday.

Under the terms of the agreement, How has a call option to purchase the shares, which is valid for six months from the date of the agreement that was entered into on Wednesday.

Call option

Siva Kumar, a former investment banker, granted the call option to How, which cannot be withdrawn once the notice has been issued.

In return for granting the call option, How has granted Siva Kumar a put option for the shares at the same price of RM1.10, which is valid for nine months.

Under the agreement, the call option may be exercised by How by serving Siva Kumar, at any time within the period of six months from the date of the deal.

The put option may also be exercised by Siva Kumar by serving How at any time in the period commencing on the date falling nine months from the date of the agreement.

Should the deal materialise, Siva Kumar will receive proceeds of some RM134mil from the sale of his 122 million odd shares in the company.

Siva Kumar first emerged as a substantial shareholder in MEGB in early October, 2011 with a 10% stake. MEGB’s price was then around RM1.10 per share.

According to Siva Kumar, MEGB has been undertaking consolidation measures and has stated its intention to dispose campuses that were not utilised. The campuses are in Ipoh, Pasir Gudang and Kota Baru.

“We are consolidating our business and disposing off what we don’t need,” he tells StarBizWeek, adding that MEGB will be able to turn around once it is able to recruit more students.

“Our operational losses is reducing and our balance sheet is getting cleaner. We have 4,000 students now and even after disposing off our assets, we still have (classroom) capacity to cater for between 14,000 and 15,000 students, which is a lot.”

After streamlining the operations, MEGB will operate from its campuses in Petaling Jaya, Cheras, Kuching and Kota Kinabalu.

The company is backed by assets worth about 62 sen. If the unutilised campuses are disposed of, of the assets worth 62 sen per share, at least half would be in the form of cash.

At its height, MEGB had some 14,000 students and was one of the most profitable education groups in the country with market capitalisation of more than RM1.5bil.

It was then helmed by Datuk Seri Edmund Santhara. Its mainstay was the nursing courses that attracted a lot of students.

Eventually the number of students passing out far outstripped the positions vacant in private hospitals. Edmund left the group last year and in came Siva Kumar as the executive director.

Edmund still holds a minority stake in MEGB while private-equity firm Crescent Point is the second largest shareholder after Siva Kumar.

A banker says that the education group will be able to start raking profits if it can bring in at least another 2,000 new students.

The banker also says MEGB had licenses that cannot be obtained so easily.

“For insance there is a freeze on new medical courses, which has been imposed on institutions of higher learning in the country until April 2016. This bodes well for existing institutions such as MEGB.”

Given his expertise in the finance industries, some believe that Siva Kumar is capable of cutting down the excesses and cleaning up the company. But he is not the man to run the operations, which is probably where How comes in.

Observers believe that How will need to create a lot of value for the education group in order to justify the price that he is proposing to pay for interest in the education group.

For investors, the story will only start to look good when How completes the acquisition of the stake from Siva Kumar. He has six months to do that. Until then, those who are not in the stock yet will probably continue to watch from the sidelines.

Masterskill , How , education