Gung-ho IPOs that fail to shine

Masterskill and JCY shares hit record lows after posting lacklustre results

THIS is the continuing tale of two high-profile IPOs last year that have failed to perform to expectations. We last featured them in February. Since then, both stocks have hit all-time lows this week after posting less than encouraging results.

The share price charts of Masterskill Education Group Bhd and JCY International Bhd look relatively lacklustre although both made their debut on the Main Market of Bursa Malaysia last year with similarly bright and gung-ho prospects during their initial public offerings (IPOs).

When Masterskill was listed on the local exchange on May 17, 2010, it fell to RM3.60 from its IPO price of RM3.80, but its shares subsequently rallied to a high of RM4.30 before falling sharply on the back of what is said to be a sell-off by some foreign funds holdings its shares.

It closed on Monday at its new record low of RM1.32, down a hefty 65.2% from its IPO price and 68.9% from its all-time high, after reporting a less-than-stellar set of second quarter profits which saw research houses promptly downgrading forecasts for the company.

Meanwhile, JCY was last traded at 42 sen, just half a sen above its all-time low of 41.5 sen, which is a fall of 73.7% from its IPO price of RM1.60, and a staggering 78.4% off its peak, with the hard disk drive (HDD) component manufacturer reporting a quarterly loss for the year.

But this is where the similarities end.

While both companies have seen their earnings decline, JCY has slipped into the red while Masterskill is still posting profits.

Hit by lower student enrolments arising from the higher nursing minimum requirement and a change in the timing of public universities intake, Masterskill posted a net profit of RM34.3mil in the first half of 2011.

But this was a decline of 30% year-on-year and not suprisingly, below the consensus estimates of research houses.

Analysts say the National Higher Education Fund Corp's loan revision scheme has further dampened sentiment on Masterskill, which is primarily a nursing and allied health sciences educator.

Loan allocation per student for all health science-related diploma courses is reduced from RM60,000 to RM45,000 and is applicable to all campuses and college locations.

Analysts say this is negative for the country's largest nursing and allied health private education provider given that its average diploma course fee is RM52,000.

Also, higher operating costs has squeezed margins.

According to Kenanga Research part of the reason for the higher operating costs is because Masterskill's lecturer-to-student ratio had increased from 1:27 to 1:22.

HwangDBS pointed out that Masterskill is also facing higher staff and advertising and promotion expenses, while OSK Research highlighted that Masterskill is facing higher depreciation charges in tandem with its capital expenditure rollout and escalating overhead expenses on increased staff count.

Over the longer term though, some analysts reckon Masterskill's prospects are still intact but said that the completion of its flagship Bangi campus will be affected due to approval delays.

It is now scheduled to be completed by end-2013 or early 2014 from the expected completion by end-2012.

The Bangi campus will have the capacity to enrol 10,000 to 12,000 students in tandem with approvals it has obtained from the authorities for more medical courses.

On its international expansion plans, group chief executive officer Datuk Seri Edmund Santhara had expressed his intentions to set up a physical presence in Indonesia and India recently.

However, there have yet to be any concrete developments on these ventures, besides the signing of several memoranda of understanding with several parties in Indonesia and talks with several Indian parties.

Meanwhile, JCY chalked up a RM31.86mil net loss for its third quarter ended June 30 on a combination of lower selling prices, lower sales volume and the weaker US dollar, with its nine-month period of the year recording a RM11.89mil net loss.

When it went public in 2010, it was the largest IPO of the year at RM1.60 per share.

The IPO raised RM750mil for major shareholder YKY Investments Ltd from the sale of a 25% block in JCY, whose sole director is 54-year-old Yong Yoong Kiong.

CIMB Research had projected net profit of RM359mil for the company in fiscal year 2010, which was subsequently revised downward to RM297.3mil.

However, JCY posted a dismal RM174.39mil in net profit for its financial year ended Sept 30, 2010, which was 14.9% lower year-on-year.

The performance of the the HDD component manufacturer is pretty much tied to the cyclical pattern in the hard disk industry.

Unfortunately, the HDD cycle turned down unexpectedly in the middle of last year as Western Digital and Seagate Technology, the world's two largest HDD producers engaged in a price war after they found themselves with an inventory surplus after weaker-than-expected demand.

Following the price war, world's leading HDD maker, Western Digital Corp, is in the midst of buying Hitachi Global Storage Technologies Ltd for US$4.3bil, while Seagate Technology, the second largest HDD manufacturer, is purchasing Samsung Electronics Co's disk drive business for US$1.4bil.

Together they will command a 90% share of the global HDD market.

Analysts say the local market may take a cue from this M&A activity.

For example, the offer by the major shareholder of Penang-based HDD component manufacturer Eng Teknologi Holdings Bhd to privatise the company, indicates “that the fledgling HDD sector may be staged for a positive change with M&A interest suggesting that value may still be found among the country's HDD manufacturers” says an analyst.

Analysts have said that JCY was also an attractive target for M&A given its current low valuations.

CIMB Research recently upgraded JCY from a “neutral” rating to a “trading buy”, saying the main re-rating catalyst for the company was the mergers of the HDD giants, which should see JCY enjoying the benefits of higher sales volumes.

JCY's business though will continue to be subjected to the trends of the global technology sector.

Hence investing in a cyclical stock like this requires in-depth knowledge of the industry and an eye to anticipate the up and down cycles.

Masterskill, on the other hand, is in the education industry which to some is seen to be relatively resilient, defensive and cash-generating. And yet, it too is struggling to stem its earnings decline.

It remains to be seen how both companies will weather out the rough predicament they are in now.

One thing is for sure though. Investors who bought into these companies at IPO prices are sitting on significant paper losses with little prospect of recouping those losses in the near future.