Paramount Corp’s REAL acquisition to boost earnings from education

Paramount Corp Bhd (Jan 12, RM1.54) Maintain buy call with target price (TP) of RM2.24 : We expect Paramount Corp Bhd to be rerated as its earnings contribution from the education division, which is more sustainable in nature, would be more significant after its acquisition of a 66% stake in REAL Education Group.

Management also indicated that its plans to monetise some education properties remain unchanged, and some asset disposals may materialise in the coming months. We believe these strategic acquisitions and disposals would support investors’ interest in the stock. Maintain “buy” with a TP of RM2.24 (48% upside).

While the market had earlier anticipated that Paramount could sell some of its education properties, the company announced a major acquisition on Wednesday. At a price tag of RM183 million, the deal values REAL at 18.9 times financial year 2016 (FY16) earnings — rather reasonable, as some education or education-related stocks such as SEG International and Sasbadi Holdings Bhd are currently trading at 39 times and 26 times price-earnings ratio, respectively.

Chief executive officer Jeffrey Chew said the owners Sim Quan Seng, Aziz Bahaman, Ee Ching Wah and Kee Keok Kay would like to retain the remaining 34% stake so that they could continue to ride on the future growth of the business.

Post acquisition, it would be a full-spectrum education service provider, as REAL will also bring the kindergarten or preschool and Cambridge English for Life segments to Paramount. The acquisition, thus, allows Paramount to have immediate exposure to the segments it currently is not present in.

It would take much longer if the company were to start and grow its business in these segments from scratch. Also, it would likely be unaffected by the overlap in the primary and secondary school segments, as the target markets are different (tuition fees from REAL are 20% to 30% lower than that of Sri KDU).

Upon completion of the deal, Paramount’s market position in the education industry would be strengthened significantly. — RHB Research Institute, Jan 12