Paramount’s KDU stake divestment a good move, say analyst

KUALA LUMPUR (Nov 21): Paramount Corp Bhd’s planned sale of its controlling stake in three KDU education institutions, which may pave the way for the eventual divestment of its entire loss-making tertiary education business, is seen as a “good move” by RHB Research Institute Sdn Bhd analyst Loong Kok Wen.

On Monday, Paramount announced that Australia’s University of Wollongong (UOW) — via UOW’s wholly-owned subsidiary UOW Global Enterprises — had inked an agreement with the group to buy a 65% stake in the business and operations of KDU University College (KDU UC) and KDU Penang University College (KDU Penang UC) for RM16 million and RM22 million respectively, and a 70% stake in KDU College Petaling Jaya (PJ) for RM500,000, or RM38.5 million collectively.

At a press conference, Paramount group chief executive officer (CEO) Jeffrey Chew said the group expects a profit gain of about RM20 million from the proposed stake sale, to be completed in three months.

Meanwhile, Loong said it is understood that Paramount’s intention is to divest from the tertiary education business as the segment is “rather competitive”. “It is a good move to rid of the loss-making business. With this, the K-12 segment can continue to grow or could potentially be monetised in future,” said Loong, referring to the group’s kindergarten to secondary school segment.

KDU UC and KDU College PJ were in the red for the financial year ended Dec 31, 2017 (FY17), with a loss after tax of RM8.3 million and RM3 million respectively. KDU Penang UC, however, posted a profit after tax of RM3.2 million for FY17.

Under the deal, UOW has also agreed to buy another 5% of KDU UC and KDU Penang UC held by Paramount in the fourth year after the completion date of the acquisition of the initial 65% stake for RM2.63 million or 5% of 10 times earnings before interest, taxes, depreciation and amortisation based on the respective institutions’ audited financial accounts for the preceding year — whichever is higher. Paramount will also irrevocably and unconditionally grant UOW a call option to purchase the remaining 30% of KDU UC and KDU Penang UC from the fifth to the seventh year from the completion date.

The parties have also agreed that Paramount shall be entitled to buy back shares in KDU College PJ from UOW in the first three years after the 70% stake is sold, so Paramount’s shareholding will be proportional to what it holds in KDU UC and KDU Penang UC, with the purchase price to be equivalent to the percentage to be bought back multiplied by RM500,000.

Prior to the proposed stake disposal, Paramount announced on Oct 25 that KDU UC and KDU Penang UC will dispose of their university campus properties worth RM420 million via an asset securitisation proposal to a special purpose vehicle (SPV) to streamline its campus assets. The properties will then be subleased back to the university colleges via Paramount’s wholly-owned unit Janahasil Sdn Bhd, which will ink a master lease agreement with the SPV.

Loong, who currently has a “buy” call on Paramount with a target price of RM2.40, said the latest development is positive for Paramount. Shares in Paramount closed two sen higher at RM2.11 on Monday, valuing the group at RM903.65 million. Over the past year, the stock has grown 27.72% from RM1.65.

Rakuten Trade Sdn Bhd vice-president Vincent Lau also viewed the proposed divestment as positive for Paramount.

“The enrolment numbers will be better with the foreign university (uow) tied up. By years five to seven [after the completion of the sale and purchase agreement], enrolment figures will be better and they (the assets) should be profitable,” he said, adding that valuation should also have improved by then. “It is good to have this call option because if they were to sell now, they might not be able to maximise the value [of these campuses] now,” Lau added.

This article first appeared in The Edge Financial Daily, on Nov 21, 2018.

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