Paramount to monetise assets when only needed
Ho Chung Teng 
Paramount will sell its education assets only if it needs to raise cash for projects
PARAMOUNT Corporation Bhd’s move to monetise its education assets is seen as positive for the company as it can unlock value and pare down its debts.

However, many are surprised that the property and education group is only disposing its private and international schools – Sekolah Sri KDU and Sri KDU International School (Sri KDU Campus) in Kota Damansara – for RM165 mil and not its other education assets as well.

As of Dec 31, last year, the Sri KDU Campus had a net book value of RM87.03 mil while the original cost of investment of RM102.54 mil. The net gain from the disposal exercise is RM72.9 mil.

Paramount estimated that its KDU education assets could be worth between RM600 mil and RM700 mil, and net gains to be unlocked is expected to range from RM232-RM332 mil.

Early this year, Paramount acquired a 66% stake in REAL Education Group for RM183 mil in a bid to emerge as one of the largest full-spectrum education service providers in the country.

Future strategy

The company says it is in no hurry to sell all its education assets, which include KDU University College, KDU Penang University College and KDU College Petaling Jaya as it prefers to wait for the right time.

Chew says Paramount wants to also use the proceeds of its education assets sale to pare down some of its debts

Group CEO and executive director Jeffrey Chew Sun Teong says the company is still looking at disposing its remaining education assets but this depends on its future strategy and cash flow requirements.

“So it is not something we are going to do [now]. If we have something coming out and the cash flow is required, then we may do it [disposal].

“We actually have prepared for it, but it’s not something we are firm on doing, whether it’s REAL or other KDU assets we have,” Chew tells FocusM, adding that it could dispose another education asset next year.

In an event cash is required, Chew says the asset disposals will be done on a piecemeal basis.

He says while the net cash generated from the asset sale could pare down Paramount’s debt or pay dividends, the disposal will impact its profits.

“This is because these [costs] will turn into rental instead of depreciation and interest costs. So you cannot keep disposing too much of it. It has to be paced out,” he says.

He says he wants future asset disposals to be gradual to ensure Paramount is not faced with a one-off significant gain.

Most investors are positive on Paramount’s asset monetisation. Its counter rose 1.63% to close at RM1.87 on Aug 1.

The announcement of the deal was made after the close of the midday session on Aug 1. However, its shares declined to close at RM1.84 on Aug 2.

Proceeds from the disposal of the Sri KDU Campus will be used to reduce borrowings (RM113 mil), reward shareholders (RM31.8 mil) and for working capital (RM19.7 mil).

The pay out to shareholders translates to 7.5 sen per share. The exercise is expected to be completed in Q4.

On the 7.5 sen dividends payout, Chew says fund managers are generally happy with the corporate exercise.

He says: “Their [funds’] effective performance is about 6% plus, so when you have 7.5% [dividend] excluding other dividends, I think generally the funds are fine.

“But individual shareholders probably have a different view because they don’t understand that the more [dividends] we pay, the more interest we carry in our books, and future [profitability] is affected.”

Asset light strategy

The disposal of the Sri KDU Campus is in line with Paramount’s aim to pursue an asset light strategy and monetise its real estate through sale-and-leaseback transactions.

The exercise will also help reduce Paramount’s gearing by 23.21% to 0.43 times from 0.56 times.

“We want to use it [the funds] efficiency to pare down some of the debts first, so that in the event there is an opportunity or requirement for investment in land, additional property launches, or to embark on a school project, we can actually draw down on the facilities again,” Chew says.

RHB Research Institute Sdn Bhd in a recent report says, including its FY17 dividend forecast of nine sen per share, Paramount’s dividend yield may potentially reach 8.8%.

“We believe Paramount is just at the beginning stage of monetising its assets. Among the others that can be monetised include the three REAL school campuses, as well as the listing of the education division.

“We think these are among the re-rating catalysts in the pipeline that could potentially drive its share price over the next one to two years,” RHB says.

Besides lowering debt levels, the sale of Paramount’s education assets also helps the property and education player to expand its education business.

The Sri KDU Campus generates the bulk of Paramount’s education division profits.

Capital outlay

With the Sri KDU Campus sold to unlisted Alpha real estate investment trust (REIT), Chew says there is an option for Paramount to request it to construct or purchase a new asset and lease that to Paramount.

“Potentially, it [Alpha REIT] will also build for us. We don’t have to put in any cash, we just go on a rental basis, so this option is on the table,” Chew says.

Alpha REIT, an unlisted and shariah-compliant REIT, is the first education REIT in Malaysia. It is managed by Alpha REIT Managers Sdn Bhd.

And based on the triple net lease agreement between Paramount and Alpha REIT, the former can lease the property for a period of 10 years, with options to extend for another 10+10 years.

Alpha REIT Managers Sdn Bhd CEO Jeyabalan Parasingam says the contract has a fixed rental and thus is steady and predictable compared with other asset classes.

“Parents need predictability to plan for school fees,” he says.

However, unlike other listed REITs, Paramount shareholders cannot enjoy asset appreciation generated from the Sri KDU Campus.

This comes as the Securities Commission has limited the offer of unlisted REITs to institutional investors.

Alpha REIT Managers Sdn Bhd chairman Datuk Stewart LaBrooy says eventually, when Alpha REIT seeks its listing, the investing public can participate in the education-based REIT.

“Employees Provident Fund [EPF] members will benefit from the returns as it is tax-free. So basically they get the full dividend,” he says. EPF is Alpha REIT’s initial investor.

Jeyabalan says the Sri KDU Campus will offer Alpha REIT a yield of about 7%, which is above the average yield of listed REITs in the country.

He says Alpha REIT plans to get its listing status within 36 months, with an assets size of between RM2 bil and RM3 bil.

This article first appeared in Focus Malaysia Issue 244.