Megastudy Edu: Business Model Remains Intact

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The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. — Ed.

Megastudy Edu’s 3Q22 OP is forecast to grow 36% y-y. In our view, uncertainties over lecturer issues have largely been reflected in the firm’s share price. Considering that: 1) the elementary and middle school division’s business model is still intact; and 2) the high school division boasts price competitiveness, the firm’s growth prospects look to remain valid. We expect the company’s valuations to normalize down the road.

Valuations still attractive despite uncertainties

We lower our TP on Megastudy Edu by 15% from W130,000 to W110,000, reflecting a cut to our target P/E from 13x to 10x in light of share price de-rating in the sector and uncertainties over the firm’s high school business. Although we revise down our OP estimate for the adult education division to reflect slow-than-expected growth at the civil service exam business and rising costs for new ventures at subsidiary IB Kimyoung, related impact is to be limited due to the division’s small contribution to overall earnings.

We maintain a Buy rating. We forecast DPS of W2,700 and DY of 4% this year (based on Sep 21 closing price of W73,800). Megastudy Edu shares look to boast both dividend and valuation merit, with a 2022E P/E of 8x and 2023F P/E of 6x. We expect valuations to normalize down the road.

3Q22 preview: Non-consolidated earnings still solid

Megastudy Edu’s consolidated 3Q22 sales and OP are estimated at W240.5bn (+23% y-y) and W66.8bn (+36% y-y), respectively, with both to surpass market expectations.

The high school division is to post 3Q22 sales of W152bn (+23% y-y) and OP ofW48.1bn (+36% y-y). As: 1) 3Q is traditionally a peak season for the division; and 2) KSAT repeaters are estimated to account for as much as 30% of the 508,000 total KSAT applicants (a 22-year high), the high school division stands to perform well. For the offline business, classes for college students preparing to retake the KSAT opened in June, and the majority of these classes have already been booked. In September~October, Megastudy Edu plans to open five Russel academies in local areas in order to attract millennial and Gen Z students who prefer studying alone or at premium study rooms.

At the elementary and middle school division, 3Q22 sales and OP are estimated at W53.1bn (+30% y-y) and W17.4bn (+41% y-y), respectively, with OPM of 33%. New membership rates for Elihigh and Mbest are estimated at over 20%.

For the adult education division, we estimate 3Q22 sales at W35bn (+12% y-y) and OP at W1bn (-18% y-y). Subsidiary IB Kimyoung is to report margin decline due to its new business ventures. And, the civil service exam business (the division’s main business) is to display slower-than-expected growth, delaying the reaching of BEP at the division.

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