Paramount ... Jun11

Paramount’s education arm, comprising KDU University College, KDU College and Sri KDU private school, produced a pre-tax profit of RM23.2 million for FY10 ended December, on revenue of RM97.6 million. That made up about 20% of the group’s FY10 core pre-tax profit of RM116.3 million (excluding a one-off gain of RM60.8 million from the disposal of a 20% stake in Jerneh Insurance Bhd).

Applying a PER of around 15 times, below peers such as HELP International Corp Bhd and SEG International Bhd (SEGi), Paramount’s education arm, if listed, could be worth about RM260 million. Some sees the possibility of a listing a few years down the road to unlock value for Paramount, whose market value stood at about RM683 million on June 6 2011, based on a share price of RM5.66.

Its net assets per share stood at RM5.42 as at March 31, but less than 10 times historical PER for its core earnings.

The valuation of HELP may be a good gauge of how much Paramount’s education division could potentially be worth. HELP has a market capitalisation of RM373.6 million and is trading at a trailing PER of 17.2 times and 15.9 times forward PER. For FY10 ended October, HELP posted a pre-tax profit of RM26.68 million on a revenue of RM105.2 million. This makes HELP about 15% larger than Paramount’s education unit in terms of pre-tax profit and 8% bigger in terms of revenue.

If Paramount’s education unit is priced at a 15% discount to HELP in terms of market capitalisation, the unit, if listed, could be worth around RM317 million. This is equivalent to 46% of Paramount’s current (07 June 2011) market capitalisation, even though the education unit accounts for only 20% of core earnings.

Paramount’s education business has fared well with pre-tax profit coming in steadily at above RM20 million a year between FY07 and FY10. Currently, the division is on a new expansion drive which could potentially see earnings reaching a much higher level from FY14/FY15 onwards.

The expansion is for both the tertiary and private school units, explaining that a new RM400 million campus for KDU University College is under construction while the group is also starting its new international school programme this September.

However, the fruit from these efforts will only come a few years later. Due to the capital cost incurred for the construction of the new campus over the next few years, earnings from the tertiary education unit will drop and offset any increase in contribution from the private school.

Overall, the performance from the education division will not have many surprises until FY14/FY15 after the new KDU University College campus is completed.

The new KDU University College campus will be built in Glenmarie, Selangor,on land acquired from The Titular Superior of the Brothers of Saint Gabriel. Phase one of the campus will be completed in 2014, at a cost of RM250 million, to cater for 5,000 students. Phase two, to be implemented at a later stage at a cost of RM150 million, will further increase student capacity at Glenmarie to 9,000.

It was the planned RM400 million investment in the new campus that spurred speculation about Paramount floating its education division to raise fresh capital.

The group owns a 4ha plot of freehold land in Pulai, Iskandar Malaysia, which it has earmarked for its education division. However, there are no immediate plans for this piece of land.

Paramount’s education division has come a long way from FY05 when it posted an operating loss of RM3.1 million before turning around in FY06 with an operating profit of RM10.3 million.

It is surprising that as a developer, the group has committed to growing its education division over the years, instead of developing for immediate profit its valuable landbank in Penang, Damansara Jaya and Kota Damansara.

The RM400 million investment in the Glenmarie campus further entrenches Paramount’s commitment to education. Together with the expansion of its private school it is set to grow the group’s education division beyond its current annual pre-tax profit of over RM20 million.