Wednesday, January 12, 2011

MEGB retracted - Greater Safety of Margin?

One stock in my portfolio is MEGB.

Today, after news on Monday (10/11) that Insider Asia's model portfolio (which I follow quite closely) acquired shares at 20k shares at RM2.39 I felt more confident on my long-term pick. But then today, it dropped further to RM 2.34 with news that a foreign fund had sold 174million of its shares last week -

That may have caused some panic understandably and some have sold off in a panic.

Here's where I quote Buffet on being a contrarion investor - Be fearful when others are greedy and greedy when others are fearful!

As such, this retraction gives a bigger margin of safety f0r retail investors (yes, you and me!) to jump in. Yes, there is a concern that FMR LLC may know something we know but that will be pure speculation. The IPO was priced at RM3.80 which was way too much to begin with! Let's examine why I like it and its downsides:

Why I like it?
I like it because it's my two favourite industries - Healthcare and Education. If you don't know already - Masterskill Education Group Berhad (MEGB) provides higher education and training in nursing and allied health sciences and you can see they are quite well advertised everywhere!

They are also undervalued in terms of PER compared to its other Malaysian Education stocks - Help and SEGI.

Being a top down investor, let me first explain what's so great about these two sectors and why I believe besides its defensive nature (low volatility), I believe there's growth:

Healthcare - With a growing, ageing population (living longer than ever to add!), there will be a need for better healthcare provision around the world. As such, there is a growing demand for healthcare professionals to cater to that need.

Education - Its an Asian thing to have a good education for our children so there will be demand to send children to higher education no matter the price! Asian parents will save on everything but will definitely spend on their Children's education! On top of that Masterskill's courses tend to have a higher margin than say HELP's or SEGI's because of the nature of their courses offered.

Potential Downside

PTPTN loans - There's a problem collecting these low (to no!) interest loans from graduates and these loans provide funding for most of MEGB's students. This was widely reported 4Q2010 resulting in the drop of its share most of that quarter.

But, no worries for help is on the way as the tax department, IRB announced this year that they will automatically be deducting the monies owed as soon as these graduated students start working with the help of legislative enactments/amendments.

The number of students currently affected - awaiting for their funding from the government are only 2% and are in Kuching. So it's overblown, some research houses have said.

Heavy Gearing? - A friend of mine mentioned they are heavily geared. I'll be honest. I took a glance here -
and first glance, it looks okay. But I will need to take a closer look.

Uncertainty for its intake of students - This is linked to the PTPTN loans but I remember a research house indicating that MEGB is a top ranked institution and it would be one of the last to get its funding cut/reduced. Also, I reiterate I am confident on these two sectors.

Fundamentals/Growth/Profits - The IPO was to generae funds to purchase and construct new buildings and expands it existing campus so the growth prospect is there.

In the last 3 financial years MEGB has a Pre-tax profits of - 56.485, 80.058, 112.289 for 2007-2009. So that's a good track record of profits! It's margin in % has steadily been around 40%!

That's quite a few thumbs up!

The only concern is the gearing which I will look our when the 2010 Financial Year Report is out. Might acquire more from my small position I have on it at the moment. I am holding this for the long term- Given my past mistakes, I need to discipline myself and learn to hold longer!

Well, that's all for me. Remember to do some of your own research before you take a plunge!

Are you a student with MEGB or investor who would like to add their 2 cents? Leave a comment below.

Disclosure: Yes, Joe does own shares in MEGB and shall not trade in it for the next 3 days.

Update 16/1- As for the end of the week - MEGB has dropped to RM2.20 - I say, still a good margin of safety to dip in.
Also - A post of interest to do with MEGB - (warning, a risky move.. purely for blogging research purposes)


  1. Question: Do you think the Govt will continue to fund PTPTN loans?

    What will happen to Masterskill if Govt tighten criteria for PTPTN loan application? Less students for Masterskill?


  2. Hi Kwong,

    You're pointed out the biggest concern - 95% of students are funded by PTPTN loans and the uncertainty behind.

    Addressing your question...I would point out that Education is a hot political issue. I think they will continue in the short term due to elections. If they were to retract, that would certainly cause an outcry among the voters. So short term, yes.

    For the long term, also a yes but maybe it will not be as PTPTN but something else( and hopefully, better managed!)

    I will say that education is a very sensitive issue and any government who touches it will be committing political suicide but if they do, the question is will there be some form of support of MASTERSKILL? (be it scholarships, other loans, subsidies, grants, etc)

    If Masterskill is well-run and training the people we need for healthcare and healthcare tourism, I think they will continue to support them.

    If the Govt does tighten criteria, it will mean less students for Masterskill given that 95% of students are funded by PTPTN. Again, I dont see this happening before elections.

    If there is any tightening... the Govt shd be smarter, it shd be more sector sensitive and knowing that Healthcare has demand for professionals, it should continue funding institutions like Masterskill.

    I am also glad that starting next year the tax department can assist PTPTN deduct the loans due so that should help PTPTN keep afloat. I see this as an easier way of helping PTPTN rather than the political sensitive of tightening and hence, giving less loans out.

    To sum it up, I think those are very valid concerns you have. Masterskill will probably have to diversify (more foreign students) and offer some sort of financial help to students themselves.